Opinion: Bernard Hickey argues NZ should look at repeating a 1936-style Quantitative Easing to build houses in Auckland and rebuild Christchurch

Opinion: Bernard Hickey argues NZ should look at repeating a 1936-style Quantitative Easing to build houses in Auckland and rebuild Christchurch

By Bernard Hickey

I am about to commit economic heresy, but at least I'm in auspicious company and it's something our own Reserve Bank and government has done before.

It's time the Reserve Bank of New Zealand started printing money and lending to our government to build houses and infrastructure, particularly in Christchurch.

Even a couple of years ago this would have been unthinkable to say, even economically treasonous. I'm sure many readers will still believe such money printing is dangerous madness guaranteed to debase the currency, create hyper-inflation and empower politicians to go on an even bigger spending spree.

But we've been here before and right now our major trading partners are doing exactly this. We should at least be talking about it.

Back in the very early days of the Reserve Bank of New Zealand, shortly after the first Labour Government was elected in 1935, the bank lent money created out of thin air to the government and various producer boards. It was used to build state houses and help fund exports of meat, wool and dairy products to the rest of the world.

This first bout of quantitative easing helped pull the New Zealand economy out of the Great Depression of the 1930s, although to be fair, many other policy actions taken by the previous centre-right United-Reform coalition before the 1935 election of Labour helped rebuild the economy and reduce unemployment.  New Zealand benefited along with the rest of the British Empire when the British pound was removed from the gold standard and the local economy really rebounded after it devalued its currency against the British pound in 1933.

But the creation of the Reserve Bank in 1934 and the drive, led by Labour's John A Lee, for a state house building drive, saw the Reserve Bank nationalised and start lending to the government.

Fast-forward to the Global Financial Crisis of 2008-2012 and now central banks throughout the Northern Hemisphere are doing similar things. The US Federal Reserve, the Bank of Japan, the Bank of England, the Peoples Bank of China and the European Central Bank have printed a combined US$10 trillion in the last four years and spent it on all manner of bonds and cash injections into banking systems.

This process is known as 'Quantitative Easing' and is often taken as a last resort after interest rates have been cut to almost zero. Many argue it has been ineffective because the money went straight into the banking system and has either been parked there, or was used to pump up the prices of various assets, including shares, gold and the bonds themselves.

Lending this newly money directly to governments to spend immediately on infrastructure, goods and services would have been much more effective. China did this most effectively. However, this is extremely controversial, because it appears to give politicians the biggest free pass to go on a giant lolly scramble. It also only works when it doesn't create inflation.

This is the crucial question that is now being debated by a relatively new brand of economics known as Modern Monetary Theory, which says deficit spending from newly printed money is unlikely to create inflation as long as there are unemployed people and assets such as buildings and machinery sitting around doing nothing.

The Reserve Bank in New Zealand has already said such a quantitative easing could be considered, but not yet because the Reserve Bank has room to cut its Official Cash Rate further towards 0% from 2.5% before actively looking at it.

But isn't it better for our government to be borrowing from its own central bank than from foreign banks and pension funds? Wouldn't it be better employing the unemployed to build new houses and repair Christchurch's infrastructure than to just sit back and let it happen? Wouldn't it be better to print the money to fund the deficit than choose to sell public assets to do it? It would devalue our currency, but is that such a bad thing when we need to boost our exports?

The big question is around inflation. Right now New Zealand's inflation is under control and the experience in Japan is that money printing over decades has not created inflation. It also isn't creating inflation in Europe or the United States at the moment.

Here endeth the heresy and the history lesson.

FYI - I've included a video interview above with Unitec Economics lecturer and economics historian Keith Rankin which looks at that period of New Zealand's economic history of the mid 1930s.

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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Why do all Statists and Socialists believe you can have your cake and eat it to? It is this complete detachment from economic reality that is destroying the West:
The more central banks print to save the system, the more the system will rely on their printing to stay solvent - and you cannot solve a debt problem with more debt, and you cannot print money without serious repercussions. The central banks are fueling a growing distrust among the creditor nations that is forcing them to take pre-emptive actions with their currency reserves. Individual investors should take note and follow-suit, because it will be a lot easier to enjoy the "Year of the Central Bank" if you own things that can actually benefit from all their printing, as opposed to things that can only be destroyed by it.
The Greek State rail system employs more people than it carries passengers. It would be cheaper to the Greek taxpayer to give all the passengers taxi chits.
Politicians are so detached from reality that Europe's unfunded State pension obligations are five times greater than Europe's current combined debt.
And you want these incompetents to be in charge of printing money and knowing what housing is needed and where?
Limited government, laissez faire, voluntarism, volunteerism, sound money: that combination is the only answer. Forget all this offensive police state rubbish.

But Mark this situation a truely free-market has never existed in history. In fact its only ever gotten about half way there or something, and then people didn't like some of the consequences so they were too afraid to go through with it. Well thats what Roger Douglas said went wrong with his reforms anyway. What makes you sure that there is light at the end of the tunnel, and the free-market is really utopia. Is it purely an article of faith (in free-market economists obvious skills building models which show you how the economy works)? Guess you are just tired of living in the NZ police state and being persecuted and spied on, on a daily basis?

Look at the alternative to a free market: a West collapsing violently into social chaos, and yes, various forms of the police state that we already are forced to live in. All set to get much worse.
Point me to how the current Big State, Keynesian socialism is working for the West?
Limited government and freedom: I'll never understand, after the oppressive weight of history, why we still have so many people who scoff and sneer at it.

Tribeless – I think the failing of western society isn’t based on forms of economics or political orientation. Over many decades we simply have lost important values such as ethic and morality. Often corrupted powerful people in societies are constantly destroying, any seeds of improvements.
Not bureaucrats, economists, policymakers, lawyers and politicians – we need philosophers for a new orientation of how we deal with each other.
Looking into current developments on many fronts – the world will never recover again, simply because among the powerful in societies ethic and moral requirements and standards don’t prevail.

Freedom of individuals, necessarily founded on free markets, is the highest ethic and morality - that is, a man's pursuit of happiness. Any other system is immoral by definition, and will end in misery, or worse, atrocity. Yes, we need the philosophy of freedom, and finally to put to rest the evil of altruism which is destroying the West.

Tribeless – because we are all individuals some with less ethical and moral standards, some are intelligent others are not, some are educated others are not – some want to see you happy, others not –  so we have a problem.
Individual freedom - right: http://www.youtube.com/watch?v=k4pJD2bIRSQ - it just doesn't work.
Before societies do not act under ethic and moral standards, I think your theory has no value = a world of chaos.

Exactly right Kunst, unconstrained Greed, combined with a lack of ethics, morals and standards.  Then given power through politcal, or economic (ie monopoly power) systems will have a massive negative impact on humanity.  It is, today, and it doesn't matter what kind of sturcture you have, Libertarian, Communist, Fascist, it all comes down to the people in power.  When all they care about is more, more, more there is no hope.

And biggest danger to liberty, freedom and the pursuit of happiness is the religious, economic, and/ or environmental purist who begins their dialogue..... So that I and my community can live the good life, you will....

David - I thought – you are not a church goer, but rather a "tree hugger" in secret.

Kunst, affected by the cold easterlies that blow through Kaikoura, said, sadly:
Individual freedom, it doesn't work.
So what did all those Allied soldiers die for in WW II then?
And remember that other society set up on this notion: the Soviet Union.
How did we get to this point and learn absolutely nothing?
I would withhold my taxes from you if I could, but this is the coercive police state you all wanted, so I can't.

How did we get to this point and learn absolutely nothing?
Tribeless – as bloggers can read with your answer, because we are all individuals.

That is a very naive reading of history, essentially history through the filter of propaganda. However we do not need to debate Marks complete ignorance of what principals the Soviet Union was based on.
What occured primarily after the second world war was the principal of universality was established as a basis for the Nuremberg trials. The Brittish simply wanted the Nazis in their custody hanged, but the Americans insisted that a trial be had. To some extent these established the Nuremberg principles, though there was international law before this,
The principal most violated is the principal of Universality, that the rule of law apply equally to future US actions as they did to the Nazis actions.
For example it might be useful to note that the US no longer considers its actions subject to the international court of justices juristiction.
This principal of universality has also been debased much further. In recent cases it now appears that the US considers non-US citizens in foreign countries do not get a trial before their guilt is established and they are subject to punishment (the death penalty). Clearly as well the principal is violated in US law due to the complete inequality of punishments applied to the wealthy and poor individuals crimes under US law.
Of course if you look at it naively it may appear that the only issue is the violation of previously established 'freedoms' but the real issue is that the change is typically to restrict the freedom and privacy of the weaker individuals while increasing freedoms at the same time for the wealthy and powerful individuals and removing accountability of governance.
However due to the well established phenomina of power structures forming in a vacuum this will only be exacerbated by shrinking the more accountable and open government and allowing private completely un-accountable power structures to form in their place.
For example it is clear from the above example that if the very powerful US state was accountable to other states through the international court of justice that its actions would  be more muted. They would be even more muted if the actions of the US state were accountable to the US population as is well established by US opinion polls. 

David B: You are right .. the danger of the religious, economic, and/ or environmental purist
I was here in Melbourne during the Black Saturday Bushfires .. which has a back story .. the areas that were destroyed were lifestyle areas that over the years had attracted the green-purist lifestylers .. they're called "tree-changers" .. as they grew in numbers they invaded the local councils and imposed their lifestyle ideas on the entire communities .. you werent allowed to remove trees and undergrowth because it destroyed the habitat of the local fauna etc etc .. back burning was banned .. fallen and dead trees had to be retained for habitat reasons .. which in turn attracted more and more tree-changers .. it just so happens the natural bush is largely eucalypt which drops massive amounts of twigs and branches .. which in turn, over a period of 10 years of drought built up a massive fuel load on the ground .. which in the end destroyed 300 lives .. many of those that survived have now left and have not returned ..

Yes, you're right. It's a terribly sad thing that many of the lives lost were preventable if appropriate management of trees and debris was allowed. I was gobsmacked to read in the paper here in NZ a case of a kiwi couple who were heavily fined (50k I think it was) at the urging of their local eco-terrorist council for clearing tress around their house to create a fire break some years prior to those fires. The sad irony of course was that they lived, and so did their house. But did they get their 50k back or a letter of apology or acknowledgment from the council that they were wrong? I doubt it.
And that's one of the frustrating things when dealing with the worst of the Ecomentalists. They are never wrong, even when they are surrounded by a pyre of sacrificed bodies.

…correct and remember on the news - the “Gulf of Mexico” – oil spill –  BP had to pay millions/ billions, because of  environmoralists – one of the reasons why petrol prices are so high now.

Well I somehow doubt that the oil spill in the Gulf of Mexico has anything to do with the current high price of oil. You should look more to the geopolitics surrounding Iran for that as well as signs of a potential increase in demand on the back of improving US economic data. Moreover, I don't think BP has paid out billions in compensation to those affected by the spill because of envirnomoralists either. In fact far from it. Try its fear of the good old fashioned US judicial system and lengthy and expensive litigation through it, as well as BP being a good corporate citizen and taking responsibility for what has happened.
When was the last time you saw the envirnomoralists take similar responsibility for anything they have f$#k up? Answer, never.

"I don't think BP has paid out billions in compensation to those affected by the spill because of envirnomoralists either. In fact far from it. Try its fear of the good old fashioned US judicial system"
Thats about as moronic as, Craig T Nelson saying "I've been on welfare and food stamps but anybody help me out? No."
Why do you think that people effected by an oil spill have any standing in US the legal system? Its also relevant that BP clearly broke regulations designed to prevent accidents and the resulting oil spill, because if they didn't break regulations or do something illegal they could not be prosecuted. BPs standards were clearly lower than the standards imposed on them, showing that they do not hold themselves to higher standards than the government sets.
I mean how self contradictory do you want to get? Republican regimes like those under Regan and Nixon at least realised that screwing over your future by polluting you own environment was retarded. The current nominees however appear to be simply morons with no policy about the future, and absolutely no idea how to govern beyond political point scoring and fighting a campaign against a ficticious hilucination of the current president. If tobacco companies were popular with a big aspect of their support base these guys would probably be claiming that the president hates smokers and wants to take away their rights by taxing tobacco companies, because he's a frickin socialist! The oddest thing is most of what they claim Obama has done (which he has not) would be quite good US policy for the government to follow. For example the US would be in a better shape now if they had taken a softer stance with Iran and not put them onto the 'axis of evil' in 2002, because they would not be fighting with them now, and at that time they were much more open to negotiation!
There are studies showing that many Afghans are simply oblivious to what had happened in the US, and are therefore completely oblivious to why the US army is there and is fighting and killing them. Making a complete lie of any notion it was appropriate for the US to invade in retaliation for the 9/11 terrorist attacks. If people are not aware of why they are being 'punished', its not punishment its simply persecution, as the US will now be perceived in a negative light by many ordinary Afghans.
No doubt anti war sentiment in the US and world was considered equally inappropriate at the time of the invasion. I hate it that NZ soldiers were and still are involved in this sham. I am not expecting an appology from the US government for getting NZ involved any time soon.

"I don't think BP has paid out billions in compensation to those affected by the spill because of envirnomoralists either. In fact far from it. Try its fear of the good old fashioned US judicial system"
I think you missed the point of what I was saying there, Nic.
Furthermore what I did write in no way implies that BP was not in breach its legal obligations at the time of the spill. On the contrary, I would have thought that fear of the good old fashioned US judicial system would have implied exactly that. Don't you think?
And tell me, what do you think would be the best way for BP to mitigate its liabilities in such circumstances?

Yes, I think people you might describe as 'environmoralists' had lots of influence when that environmental protection legislation was written. There were also people concerned with moral concerns of creating safe work environments who also had influences on some of the other regulations breached. The government doesn't just magically know what is the right and wrong of bits of legislation. They are pressured by people, including people concerned about the environment and pollution and workplace safety, when writing laws. Is that clear enough or do you need smaller steps?
The best way for BP to behave is not to mitigate its responsibilities but to face up to them and pay them. It should also change its behaviour to do better in these areas in future.

The best way for BP to behave is not to mitigate its responsibilities but to face up to them and pay them.
But that's what it's doing, you silly man.

My God, the standard of debate and commentary has just dropped so low around here it's unbelievable.

Agree about the standard of debate. You totally missed why you are behaving like Craig T Nelson and don't appear to know what the word mitigate means.

I tend to think of socialists a bit like consultants.
The Wealthy Person: I've got this problem, there are all these poor people around and they are stinking the place out. Why can't they just get off their asses, get better jobs and leave me alone.
The Socialist Consultant: Well, those people are poor because they lack means, not because they want to be poor. Maybe you could give them a hand up and help them to lift their position in society and then everybody could be better off.
The Wealthy Person: Ok, good idea I will go an do that.
The Wealthy Person: You socialists are just useless, your plan didn't work, I rented out one of my properties to them but they could not afford to pay the rent and it damaged my rental values. This socialism idea is just utopian and expensive. I thought you were going to make the poor people go away some how.
The Socialist Consultant: (rolls eyes).
Isn't the 'prefferential treatment for the poor' one of the more benevolent ideas to emerge from Christianity.
But if you don't believe that the poorer majority could legitimately raise their means, at the expence of the wealthy and powerful, then you don't believe in democracy in any real sense. You only believe in rule by the present plutocracy.
The biggest danger to freedom is that society starts to apply different standards and rules and asperations to different members of society.

Your argument that the poor are simply not pulling their weight might make sense in an economy without money and property rights, but in the real world it doesn't make a jot of sense. See in a world without money and property rights you really must earn everything you have (which is why Marx thought this is the right direction to head in morally). Its also why various free-market economists really need the idea that the market is always correct to function, but unfortunately this argument doesn't hold up in practise.
In the real world the wealthy start out with many structural advantages so they are to the degree that these advantages hold forcing the poor into their position. This holds as true today as when the aristocracy used to simply tax everybody, live (very well) off their taxes, and at various stages simply use them as slave labour.
For example one structural advantage which the wealthy start off with is they receive income over and above the needs of subsistence. Once in this position you can use that surplus to invest and earn additional income. Additional to that the banking system favours two things at once through deposit guarantees. It both insures this and allows it to be used productively. If you really risked your invested money this would be less of an advantage because real savings would have to be kept separately from investment. Thats one structural advantage, which keeps the initial situation in place. Another structural advantage which has a much longer historic basis is the ability to rent out property. There are pleanty of others, for example somebody with a higher wealth can leverage it and afford to buy property in the first place, and while this is a risk it historically has appreciated in value further. This is not an opportunity which everybody is afforded, and its actually one of the main drivers of inflation so that really is keeping others down.
In a society which affords equal opportunity you need to balance these structural advantages in some way. Since there should be a reward for hard work, I do think that those who work hard deserve it, but I might not think that some activities which the market values are really that laudable.
One would have to ask, with reference to your painting example, what the rental costs are and how much this would have cost you if you were not getting the tenant to do this. Who is taking advantage of who in this example given that he lives up to his end of the bargain?
You are hardly doing anybody a favour by letting them rent your property in the first place, its something you are well compensated for. I doubt you would choose to own them if they could not be rented in the first place. If 1, 3, 4, 5 and 6 are not worth the effort I recommend you get out of the rental game and 2 you can decide to do or not for yourself. 
You don't appear to be very satisfied with the results of improving your own social standing, as you are projecting jelousy of others who get to stay there and party? Does this mean you regret doing it? Why do you want others to subject themselves to the same transition if its not worth their efforts and you are not satisfied with the results?

"Doing cost competitive cheap rentals of reasonable condition, is a favour.  They can scrounge for the money to pay the high cost places or go live under a bridge." Its not a favour, its clearly a fair exchange, or probably in your favour if you keep on doing it because you can clearly walk away. Go ahead, seems like you want to. In fact if you were not there then there are pleanty of others like you, and if they were not then the demand for this drops and this makes it more affordable for the people you are presently renting to and nobody to take the premium off them to boot. Sell the rentals, everybody wins.
Expecting your tennants to work for you is hardly doing favours either. Plainly they don't want to do it, who are you to make them?

"Tribeless" - Altruism doesn't exist.
Excessive socialist policies are not created by people giving away their own money. They are created by people giving away other peoples money, and funnelling it towards their own favoured whanau/family/interest group.
How do you feel about the prospect of quantitative easing boosting other peoples wealth while at the same time dropping the value of each $ you currently have?
It's just another way of channelling $ towards a particular group. It's the same sort of "altruism" you mention that redistributes money from one group to another.
QE is socialist capitalism. The wealthy will benefit hugely while the strugglers who can't get themselves into the money chain will lose out.

Look at a free market (if we ever got one) -- a west collapsing violently into social chaos, haves and have nots, anti-science (the micro economics theory behind the free market idea lacks scientific rigour and logic).

What are you talking about? We don't have free markets, we have crony capitalism and markets in which State coercion is in every single transaction, right down to buying something from the $2 shop.
Look to Europe to see, again, where planned economies, based on planned societies, end up: there will probably be a bloody revolution in Greece, for starters.
anti-science (the micro economics theory behind the free market idea lacks scientific rigour and logic).
Explain that fully please? And cite for me one example of central planning matching the complex needs and desires of every individual in a society, better than free markets can, being that free markets are simply the expression and trading place of those needs and desires. And even if you could, and you can't, that still would not make up for the necessary loss of an individual's freedom and privacy which is the foundation of the planned economy.

But Mark, if this situation has never existed then how do we know that the world at the end of the tunnel is utopian? Is this simply an article of faith? Or is there some evidence that the free-market creates a free-society? Maybe the freedom of the market would destroy, or hamper the freedoms of the individuals?
For example a close analogy to this is the notion of free-banking. This has basically been given up on by economists in theory, and its assumed that research will be taken up again when it becomes closer to being established in practise. So its just an article of faith for some economists that the reforms produce a good result.
Also looking at the historical research it is very thin. Its also interesting that the research completely ignores the implementation and effects of the 1844 bank charter act in the UK. Kind of like the economists involved are looking for evidence to support their beliefs rather than investigating the effects of the policies they believe work in a fair and balanced way.
In some of the historical cases (but not all) the examples of free-banking ended in crashes on a large scale. Also clearly Murray Rothbard is very critical of the patchy historical research actually done, which might indicate some economists cherry picking examples to support their beliefs.
Certainly the half measures towards a free-market appear to have some very negative consequences, including all the fraud now condoned by the US financial system. The answer by free-market reformers is always that further measures must be applied before the free-market actually works. But where is the evidence that the road is actually heading in the right direction. It is far from typical to start off in a northerly direction while expecting to arrive to the south of your starting point. If free-market reforms are truely utopian should we not expect that half measures would create some benefits.
Is it more than an article of faith that free-market reforms are actually a good thing. To me it seems possible that free is often a nice label to have attached to your favourite ideas, but this doesn't actually have to have very much substance to it. It seems entirely possible than many Libertarians end up in a position where they are supporting self contradictary statements like 'hands off my medicare you socialists'.
It seems to me the only problem with US socialism is most Americans would like their government to take more care of them and less care of their bosses and 'owners'. Thats a very democratic direction, not a conflict between capitalism and socialism.

It's not an abundance of knowleged, but a lack of knowlege, that leads people to believe they have the only answer, especially in regard to highly complex systems such as economies.

Why do that when the middle class can pay for it...

" a giant lolly scramble".......also known as a giant vote chasing fraud.
Simple question Bernard....exactly what would govt spend the QE paper on in chch and across NZ?
Give us specific examples.
Second matter for you work on: How would overseas bond markets react?
Third: What would the consequences be from that reaction?
Four: Would the consequences be far more damaging to far more New Zealanders than any 'benefit had from using the QE paper.?
Five: If chch received the QE paper, how do you think Auckland voters would react when told by govt they will not be getting the QE paper spent in Auckland?
Six: What incentive would there be to save, when it became obvious even to fools that today's money would be tomorrows toilet tissues?
As for your suggestion that we have no inflation problem...I say humbug because you will not know we have a problem until it arrives and by then it will be too late to control without some nasty actions as in Greece...think what they are paying for bank debt on property!
Inflation is running somewhere near 3% pa at present..that's a 30% debasement of the currency and of savings every decade....I have never seen an article on this site detailing the damage this policy choice leads to....never!

I can't understand why Bernard has so lost the plot - I thought he was meant to be some kind of economist.
Why can't we just make it easier for the private sector to build stuff?
What mindset always has to revert to "Nanny State has to do X, or Y, or Z" to fix our problems?
I don't disagree about relaxing inflation targets for the RBNZ, as long as the conditions that cause further bubbling in property are eliminated, i.e. growth restraint regulations. This would mean that prices could come down in real terms, as dollar income (and price levels generally) inflates, which would minimise the "negative equity" situations that has done so much damage in California etc.
This is what happened in the 1970's. Rodney Dickens calls it "washing away our housing bubble sins in a tide of inflation".
What will happen now, is that the eco Taleban will jump all over me. They are worse than the medieval papal theocracy - this is what we have got to show for "the Enlightenment". Apparently NZ is running out of room - when Japan has 130 million people on less land, and the Netherlands has 18 million in space the size of Canterbury.
If Mr Hickey wants his blog turned into just another post-rational left - Green loony one, I just hope someone else starts a real finance and economics one. But the best Kiwis, who actually had any intelligence, have already gone. NZ will probably be the first Anglo Saxon Banana Republic.

If only we could grow bananas eh.

Just need to elect some banana republicans then the seeds will become well established on NZ soil.

Wolly - just considering ChCh infrastructure repair and replacement, it's one of those choices that isn't. So why would a rating agency not see QE style funding as less of a problem because further debt is not created and capability is being recovered and developed to support repayment of existing debt?
"So, that’s a brief outline of what happened in the two [Weimar and Zim] most notorious cases of hyperinflation.  Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity."

Les....printing coloured paper to pay suppliers for materials and workers wages and council fees and "experts" fat charges and gst on top of the lot...QE...is not a solution because it has no control...no valve to stop the splurging madness that would develop. You have to learn to see that. A cost to credit is a safety valve...if the RBNZ does not shove its big fat nose in the way....
You say chch...please define chch?...are you saying only the urban area?...are you including private and public ....churches and schools....roads and pipes....bridges and tunnels....cliff protection and ground stabilization(remember the Gerry Trench promise) where does it stop Les?
And how do you stop the use of the QE to solve the rotting building rats nest of filth?...why should this not be eligible for your QE splurge?...come on Les.....explain yourself!

Morning Wolly.
"cost of credit" as a "control valve" - errr, yeah righ, how's that working out for us:
So the control of this kind of funding comes from what is and isn't in scope, ie. your last questions. In terms of ChCh repair and redevlopment of public infrastructure; just that, no private stuff. From your list, so eg. churches, cliff protection for private residences, out. Schools, roads, pipes, bridges, tunnels, in.
"rotting builds" - caused by eq = nope, hence out. (What caused it? Maybe a class action then? Oh that's right,... as you pointed out recently. Funny old world eh.)
So by debating the issue a set of rules, protocols would emerge that define in and out for events such as the ChCh eqs. (Other spend types could also be debated and defined, eg. to address the housing shortage BH outlines.) However no debate and we end up renting private funding with the extra inflationary addition of interest to fund activity that isn't really a choice. 
Cheers, Les.

C'mon, sir, wot did I get wrong this time, Wolly?
[Hey, where is GBH these days?]

Bernard, you have comitted heresy and you should be excommunicated.  Some transgrssions may be excused but not this one.

Well said above... let me add with respects Christchurch:
1. How would the money make a dam difference given what is holding things up currently:
Supply chain monopoly on Building for EQC
Supply chain restriction strategy by a few players in the building industry.
That should be enough hurdles to start with to get the point across.

Is that true for all aspects of public infrastructure? It's being repaired and rebuilt now, except with money we are renting from private lenders. Why should we continue to do that? Especially as such borrowing is at interest, the addition of which generates inflation?
Also see my reply to Wolly above at 26 Feb 12, 8:07am.

Is that true for all aspects of public infrastructure? It's being repaired and rebuilt now, except with money we are renting from private lenders. Why should we continue to do that? Especially as such borrowing is at interest, the addition of which generates inflation?

Actually you have that a bit wrong. Its not the borrowing at interest which creates the inflation, its the borrowing. Underlying the economy since the 70s and 80s there has been a gradual increase in the per capita debt burden. It was possible earlier as well, but there was less appetite for credit and better capital controls were in place, and the process had only just started.
Its a change in this (probably triggered by dubious lending, but it had to happen eventually anyway) which underlies the recession. Its not the interest payments, its the fact the amount of money is expanding that causes the inflation (because bank credit is money for all practical purposes).
I know the argument is that interest payments must cause this to happen, but thats simplistic and incorrect. Interest payments can be met for productive debt and its the collapse of un-productive debt which forms in a bubble which has caused the recession.
Of course in a debt based money system you need debt to have money, and the fact that the national debt can't be paid off because of this makes this argument somewhat convincing that interest payments are an issue. In fact in most cases a productive national economy can sustain much higher national debt, this should be obvious from the fact the previous Labour government managed to pay it down not only to meet the interest payments. Its the collapse of productivity in the economy which is making this a burden.
The monetary system would be simpler, more stable and function better if money was issued debt free and without private credit. I am convinced of that much, but we should not support that concept with a naive argument because it will taint the concept when it is exposed as incorrect.

Go back to basics Nic you are confusing yourself. If I give you $100 at 5% interest you have to pay me back $105 but only $100 is issued so you have to borrow a further $5 from me after you've payed back the $100 — hence inflation.
Where people seem not to understand is that the easy $5 is more correctly termed credit expansion. 
Inflation is merely a concept that the world has finite resources so if you add 5% to the money supply then each dollar buys less. 
The reality is that this is a theory and personally I am not persuaded. 

Thats incorrect, and naive as I said. If I invest that money productively I can produce a steady stream of income. At the most simple level this works because the money gets recycled several times by the economy. As long as the profit stream is more than 5% then the interest can be paid.
This explains a similar thing better.

I perhaps should have said, " Especially as such borrowing is at interest, the addition of which generates it's own component of inflation?" Given I was making the comparison with interest free issued money, where this resulting component does not exist. Whether the interest can be paid back by productive investment, or not, the point is, in comparison to debt+interest funding the work under discussion, the absence of the associated component of inflation is another advantage of funding with nil interest via reserve bank credit.
I wish we had time to discuss chaotic limits and rate of change of inflation wrt the interest rate generated component of inflation. Seems odd to me that we treat the symptom with more of the cause and yet expect purchasing power to remain stable. Anyway economisseds know best, I guess - which is something I am no longer ashamed to do, having spent a deal of time with economisseds. 
Thanks, Les.

moves to have bernard made a saint have been put on hold until further notice and no corospondence will be entered into how ever if you are going to print money  send some my way as i need a new house ,car and bach.
i don't suppose this will affect inflation.
i await your cheque.

The house and the batch are items of infrastructure...you deserve the money....Bernard has your name at the top of his list...are you a member of the National Party?...it will matter while they are in the pig trough...you can switch to Labour when Shearer gets his turn.

Good to consider different prespectives Bernard. I happen to think this policy is appropriate at present under the current financial framework. However I also agree that government spending new money created by the central bank has a seductive lure to it. What would help is if economists could produce a model which showed actual skill in forecasting the effects of this in the economy. Skill being a technical term.
One problem with doing this through MMT is that the actual variables MMT talks about such as savings are not measurable because they are not monetary based (they are more abstract concepts which are partially monetary). Another is the models are equilibrium based and the economy is mostly never in equilibrium. If these issues were addressed however there might be a sensible way to actually forecast the likely effects of policy, rather than the present system of claiming a particular state and circumstances and then applying policy and claiming it worked.
Notice Greece has pretty clearly defaulted already despite (or I think because of) IMF (meaning mostly free-market and austerity) reforms being applied there. I guess the IMF will say that they didn't go far enough fast enough, rather than oops we forgot which way was up for the economy.

I am about to commit economic heresy.........
Whoooa, Bernard!!! Everybody, stand back! Come on, mate, flash us your ankles!
Sounds good to me. As an economic pragmatist, I say let’s do it. In fact I've being thinking of the same thing for some time. It will help us maintain a level playing field with the actions of some of our larger trading partners, we do need the money to pay for Christchurch, and possibly, it may also help to lower our exchange rate a bit as all these new Kiwi dollars flood onto the market.

Bernard: It's a problem when you only tell half the story, cherrypicking the bits that fit the story or agenda or whatever .. try this (what else was happening in 1936) ... covers the period you are talking about .. and the pre-requisites of labour and work and effort  ... away you go ... start here ..
Unemployment Act 1930
In 1930, while Prime Minister George Forbes was in London for the 1930 Imperial Conference, the United Government passed the Unemployment Act, promising relief payments to those who registered as unemployed. Upon his return to New Zealand in January 1931, Forbes announced there would be no payments made without work, meaning those registered would have to participate in government 'make work' schemes such as building roads and working on farms or in forestry projects. When the register was opened in February, 23,000 people put their names down; by June the number of registered unemployed had risen to 51,000 as the Great Depression worsened. The register did not include women, Māori, or boys under 16. In 1933 (by which time the number of unemployed had reached 80,000), MP Gordon Coates introduced the Small Farms (Relief of Unemployment) Bill to help turn unemployed workers into small farmers.
That is how much of NZ's infratructure was produced. Can you see that happening today?

Iconoclast, maybe it's the efects of a late afternoon tea, but for the life of me I don't get what point you're trying to make???

Simple .. after the depression .. the unemployed were put to work on make work schemes such as building roads and state houses .. bernard is suggesting .. hey-presto .. repeat the 1930's magic pudding by printing .. there's much more to the story than that .. research it .. the main point being .. the unemployed had to work .. can you see that happening today?

Without RBNZ providing funds as described, would the economic impacts of the approach and progress of the project have been better or worse?

I dont disagree with the funding .. it was the use of cheap forced labour .. and it was targetted .. I repeat the question .. can you see that being done today ?.. If you can't then bernard has a problem .. he needs to clarify or dissemble a bit more

I actually think it's very hard to say, but you may be right as it is a very different world now and the values and sense of being entitled are very different now to what they once were.
And no doubt if the work schemes were compulsory you'd get the usual suspects (Bradshaw, minto, some in the unions, Labourgreens) who would come out in opposition to it. But I remember back in the 80s when Muldoon I think it was introduced work for the dole schemes. Many of the unemployed loved it because it actually gave them something to do. And of course if they didn't turn up they didn't get paid. So a firm hand could win the day? But our numbers of unemployed are much lower now than they were in the 30s and even back in the 80s, and are mainly among the young, so I wonder if a KiwiQE1 was instituted whether it would really make much of a difference to the current unemployed anyway?

It was the urban families with an unemployed male that took the boot in the face...and they got to doff their caps to the fat banker as he drove past...The lucky were single and in rural regions where deer pig trout and seafood were found, along with fuelwood and the shelter of home made huts.
No way would the unemployed of today follow  such orders from some govt slob....I know what would get planted!

Are you seriously trying to imply some form of government conscription was involved. Just from the statements "When the register was opened in February, 23,000 people put their names down;" you can see it was essentially a volunteer scheme. This clearly indicates that when there is work available many unemployed people will volunteer to work for an income, which could hardly come as a surprise. Its abundantly clear that the government making work available goes a long way towards solving a present unemployment problem. It probably helps if the work does something useful in future as well, though if this is necessary from this is unclear.

Govt makes people work for money, instead of giving it away for free.  As it stands we have DPB recipients "earning" over the median wage.  What happened then was that govt expenditure was going toward production.  Nowdays I have NFI where it's going?  The fungal black hole?

You got it

About $1.3 billion goes to the landlords by way of the 'rent supplement' skudiv!...every year....and they 'invest' in more renters...and raise the rents....and collect more benefits....it's a fabulous farce.....govt pork that wins votes from tenants...landlords....and bankers....brilliant.

No problem with the theory Bernard, it's the practise that is the problem. How do you close the flood gate once it is opened? Specifically, if house prices adjust downwards there will be a change of government to whichever side promises more printing. What stops that process?

I wonder if Rowlings new book for adults is all about the thieving banking class that owns the peasants outright and plunders the nations wealth at will..all with the determined support of the lying politicians and BoE bosses.
Seems to me it might be a bit too violent for the govt censor to allow on the bookshelves..bound to be banned in the schools....prison terms for those caught reading it in public...
She wouldn't have to try hard to identify the worst of the scum. Perhaps this explains why the book is wrapped in a secret and hidden in a mystery.

Printing= Stealing Bernard, YOU KNOW THIS!

I don't think its any different to providing a monentry policy target of positive inflation, and then taxing nominal intrest payments.
In effect both printing and the above are a tax on savings.

"saw the Reserve Bank nationalised and start lending to the government."
Why on EARTH would any government lend to itself IF that was really true?
Unlike in the 1930's Bernard we now have a currency that's bought & sold. 

Seriously Bernard, you are overstating the problems, the economy is growing, M3 is growing by >6% (which is faster then the US, EZ, Jp) pleanty of debasement there.  Not to mention John Key is building himself a brighter future.  Save the Keynsian Endgame Madness for when we may actually need it.
If you take medicine when you are well, it reduces the impact when you are sick and really need it, because you build up immunity.  Which partly explains why rate cuts are no longer as effective as they used to be.
If things are that bad that we need to use "printing" when we are having high house prices, record commodity prices, and people on welfare with higher net income then the median wage.  We are already stuffed, and printing wont achieve anything more then a protracted death.
What we need to be doing while times are good, is work on increasing income, not expenses.  Balance the books, get the surplus comming, sensible planning, govt should be in a position to buy assets, not sell them.  Instead they increase expenses and decrease income.  You don't reward incompetence with free money, thats an insult to anyone who has to work for it.

Anyone care to throw out a definition of inflation, so that we can see what effect an increase in the amount of money in circulation will have on "inflation?". 

Inflation:  the stealing or eroding of $ value
Any simpler definiton?

New dollars are created and have no intrinsic value (other then BTU) so they must then take value from the dollars that are in circulation.  Therefore the creation on new dollars from thin air must be inflation.

Yet you ignore the liquidity trap problem....hence from all the printing in the last 4 years we are still at 2% core...
Inflation is best described as the effect ppl expect to see.....but its self supporting once it takes off.......
and when you consider inefficiencies in the economic system 2% is dangeriously close to tipping into deflation, which is self supporting...see above on inflation.

The fact that we are at 2% is stunning, given the massive deflationary pressures that have been exerted.  Even in NZ all those finance companies collapsing, revealing billions of missing cash should have had a deflationary effect, yet thanks to govt and central bank intervention we are still running inflation.
So you would define inflation, as rising prices?
The greater the constraints on supply, and the more inflexible the demand, the more obvious the effects of increasing the money supply will be.  Items with flexible demand, high competition, and few constraints upon supply will be the last to show inflation.  I believe Core falls into the second catergory.  Which is why we are seeing Bi-flation.

While it may be true that money printing causes debasement of the currency the time-scales over which this occurs should be examined. There is maybe some kind of maximum leverage which can be supported by the financial system, but how long might potentially elapse between equilibrium states of the economy when maximum leverage might be reached? In fact looking at debt to GDP ratios they have been growing at some rate or another effectively over the time scale 1945-2008.
Also looking at these graphs and assuming there is some similarity between today and the period around 1934 (there are indicators) any additional debasement is probably 10 years away at earliest.
Does it really seem sensible to make decisions now while considering (and ranking highly) factors which might begin to appear probably 10 years hence? In fact considering that the economy is probably not in equilibrium state at almost any time I doubt that using an underlying equilibrium model makes much sense at all or tells you anything sensible about what is going to come to pass anyway. The increase in employment created with the new money could easily swallow up this much extra spending power causing zero inflation, as could the amount of deflation anticipated over a 10 year timescale, comparing say the situation to Japans deflation.
There are real immediate threats which NZ might want to de-risk in the economy and in many cases this might need real investment up front.

Homework for you Nic...
granted it's a look at cheap credit but throw in the BoE printing done to facilitate the 'cheap' and there are consequences....time you learned about them.

I don't understand the connection at all. What does BofE QE have to do with the official cash rate? They are not connected. QE basically creates bank reserves allowing banks to lend where there is demand, but other than this making the banking system more stable (and probably influencing banker rewards) it doesn't have much effect without demand for credit.
Of course the way to avoid issues with the OCR and savers vs speculators is to avoid crashes in the first place but in my opinion this can only really be achieved by serious financial system reforms like 100% reserve banking.
There was actually a pretty good example of this in practise and on a large scale which is relevant. The problems are similar to the older issue with individual banks issuing their own notes, rather than now their own demand deposits. This also caused boom and bust cycles before 1844. A few people at the time even realised that demand deposits could have the same issue but unfortunately the banking system was only partially reformed then.
Of course in 1844 there was a lot less efficiency in the demand deposits system, and the only part of the banking system which could work near as efficiently as todays electronic transfers network was currency payments.
There are consequences to doing nothing as well, and these could be that the OCR stays lower for longer for one thing. I would also point out that there is a significant difference between spending the results of QE and putting them into bank reserves.

Love the well placed 'f' Nic....the QE was part and parcel of the BoE effort to make money cheap...exactly the same intention as Bollard's ocr slashing...to drive down rates...while inflation carried on regardless...but the spin said otherwise...it still does...Merv is a liar.
The unintended but acceptable consequence has been the destruction of income for those with savings and the debasement of those savings....
You suggested QE was a way to fix things up...I was pointing out that people get hurt...people who did not take stupid risks with credit.

Making banks less prone to failure is not going to fix the economy. That requires more credit to flow from the banks, which was never going to happen. Thats all the job of a central bank is of course, to prevent bank failures is still their number 1 objective. QE is a way to support this banking stability, maybe more lending was the hope, it appears to have been Bernanke's objective, but it has not succeeded for good reasons.
If they increased the OCR I would anticipate a sharp drop in consumption spending as mortgage owners payments increased. You might think this moral but its going to tank employment if it happens.
If you world view requires key public figures to be habitual liars I will tend to dismiss it, because I reject most conspiracy theories on spec. Maybe if you had evidence of him lying but you are unlikely to find that even if it existed (which I have no doubt it doesn't).
The simplest explanation is that the economy can't be fixed solely by the actions of central bankers, thats also consistent with their own views that they can't control inflation/deflation. Your arguments require that they can and therefore they must be lying about their intentions but its really ridiculus, the simplest explanation is the most likely and is correct.

QE has other effects to be sure.  You don't need QE to enable banks to lend, there are other facilities for that.  Or else QE would be a common occurence, not a bazooka.
Making the bank system more stable, by deleveraging it, ie. increasing the amount of "cash" on hand, and reducing the amount of debt outstanding.
Now the money that was in UK bonds for example, has to find a new home (in a QE the bank sells a bond to the BoE.)  So the money goes into somewhere safe(?) currently money is flowing into commodities, so the money goes into gold/oil/steel etc.  Increasing the sale price recieved by the suppliers of commodities.  This is where we are today.  Next the suppliers of commodities are making bigger profits, and the money flows on to where they choose to spend it, and then on, and on etc untill it finally hits the 128' flatscreen TV in the CPI, and all of sudden the CPI is rising, and interest rates are going up, and noone knows why this is happening.
The purchase of a bond with newly created money, from thin air, without even the backing of a fractional reserve, displaces other dollars, pushing up prices, and flows through the entire economy.  Maybe 10 years, you don't know that, and using models, or examples from a gold standard is not a realistic way to forcast the future with fiat dollars.

Core is designed to take out noise and volitility, annual price flucuations etc....it plots medium and long terms trends, hence its a very good indicator for planing purposes....

Inflation / deflation is quite clearly defined, it is an increase or decrease in aggregate price. But there is some contention about the mechanism which causes it. I tend to see it as a fairly concrete thing which has little to do with macro expectations myself. I used to think that the recent inflation was caused by QE of the US fed, being used to trade commodities. I don't really think this caused much of it any more.
In my opinion the way this happens is through typical balance sheet operations. I think most of the recent inflation was caused when many businesses saw their incomes fall due to decreased turn over. In response they immediately increased prices to make up for the decreased turnover and try to maintain profit levels. Eventually however this is a self defeating strategy. Consumers will turn to cheaper alternatives, or decrease their consumption. At this point deflation sets in, but I think this mechanism describes why initially there has been an up-tick in some prices eventually turning to downward movement. In places like Greece and Ireland however deflation has thoroughly set in.
Unfortunately its got many people all excited about central bank monetary policy, but this has clearly not had the effect which would be proportionate to the supposed cause.

You are talking abour "price inflation" then.  For clarity which prices?  Food, energy, durable goods, services, commodities, housing or consumables?  Claims of inflation or deflation may be true with proper clarity about the definition of "inflation".  For example the price of Oil is at record highs in Euros, which includes Greece and Ireland.
 The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term "inflation" to refer to a rise in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation'.[23] Economists generally agree that in the long run, inflation is caused by increases in the money supply. However, in the short and medium term, inflation is largely dependent on supply and demand pressures in the economy.[24]

The price level applies to everything on which money is spent. All your categories and also wages. Thats because if you want to talk about loss of spending power you need to consider all spending, basically.
The only thing not in there is the cost of credit. This is so long run and unlikely to be in equlibrium that I think it should just be considered a growth or shrinking of the money supply, not controlled by the central bank. Its not a very main stream economics view, but I consider the growth and shrinking of credit to be a short run cause of inflation in the money supply. There are empirical studies which I base this on. So basically you can only govern part of the money supply is my view. Other than that I agree with wikipaedia. I would justify this by saying that people use credit for money now (and its common), so you need to consider that inflation.
I think NZ is late into the deflation, compared to most other economies. Incidentally the same late entry appears to have happened during the great depression as well.

What deflation?  This is what I fail to understand, all these people talking about deflation, what is deflating?
The only thing I can see deflating is the credibility of people claiming inflation is deflation.

Primarily deflation has been in wages and house prices. Of course this Sucks if you are a worker. You should also consider the drop in turnover underlying the CPI measures, though this is not deflation, its factors relating to deflation. This says to many economists that the CPI is heading towards deflation. 
Here is a longer term trend for Greece,
You might also consider Ireland,
CPI is only ever part of the aggregate, and if you look at the debasement of money it doesn't appear to pick up the biggest changes in inflation either (e.g house prices often rose faster than the CPI prior to the crisis). Of course a very weak turn over is a poor indicator of price level so its hard to get really solid data for the housing market at present.
As I said I also see NZ being late to the party and one of the better placed economies with lower initial government debt.

Skudiv, the back rear left tyre on my wife's car has been slowing deflating.
Not a worry though as I've reflated it free - three times now, (so technically its running on QE3, I'll guarantee though - unless I have it fixed a QE4) - each time back to 28psi. I can reflate it endlessly at no cost, the only difference is that with the economy there is no pressure indicator telling me when to disconnect the hose and the thing can keep inflating even after the hose is disconnected and I have little or no control as to where that extra air actually flows to...(nor how much savings will be destroyed on the way).... so I'd just have to guess... in which case I'd be warning people not to stand too close to that tyre...

So the air hose is the money, and the hole is like how in '98 I could get 24mb of RAM for $100, and now I can get 240 mb DDRAMM for $100.  A 1,000% increase in purchasing power/deflation?  A price indicator of inflation.
Or is it defaults are the hole, and as long as long as you keep the money supply (pressure) constant, it's ok to pump?  A money supply indicator of inflation?
There are pressure indicators, things with inflexible supply/demand such as oil.  They are saying "It's not ok; to print".

As to the tyre - you question was what was deflating...
You can't control the effects of printing and when they will appear and in what form... so it's not actually like putting air in a flat tyre....
Oil prices tend to be volitile anyway (which is why the argument for core inflation measures is to exclude food and energy - I'm not saying I entirely agre with that), no one knows how much is due to printing or other reasons...
Or you could also say as long as oil is actually transacted in USD (and those days are numbered) oil is saying you can get away with printing but not without penalty.

So using your own simplistic model when you print you inflate, so when you print into a deflationary environment they cancel out....and oh shock, this is what you are seeing.

Listen Stephen, you can't just put two simplistic models together and make it work. When your making a ridiculus analogy you should stick within the confines other wise its just rubbish, and a conspiracy theory. Now I am going to tell you what you should think for yourself.
First of all if you pump up the tyres thats inflation, thats bad. But then the tyre goes into deflation you know, cause its got a leek. Thats called socialism, and too much socialism leads to slashing tyres its really unhealthy. But when your tyres deflating and you start pumping it up then your tyre reflates? What are you thinking, wrong again. What happens is the tyre explodes, bang how you like that? Thats why you need gold rims you see, cause soon there won't be no rubber on the road. Mmmmm, shiny shiny gold, gold rims.
Thats how the economy works, when you analyse the economy as a tyre.
Now go and read my favourite moralistic cartoon...

You are right of course its dangerious to take simple models and believe in them totally...

"Greece Core Inflation Rate is at 0.94%, compared to 1.03% last month and 3.54% last year. This is lower than the long term average of 6.93%."
Like Ive said, dis-inflation  %3.54-0.94=  - 2.6% dis-inflation per annum....
So roughly, 2.6/12 = 0.2 per month......6 months could see Greece in deflation....
Take the 10 years and just look at that trend drop...

Consumers who are in the US anyway hurting hugely are voting with their feet it seems....so no corporation can raise prices, ones that raise say 8% lose 7% of volume....so another way here aka Cadbury is to make the bars smaller and add cheaper components...
So drop 200g to 180g...and add fructose, palm oil.....water....etc. that hasnt gone to well so now they hide the ingredients....palm oil is no longer mentioned, now they use vegitable oil...kind of makes labeling laws pointless when compliance isnt watched.
Some good news is being lactose intolerent we have to avoid any milk solids, now soy is cheaper quite a few prodcuts have swapped...
Deflation sets in, indeed but I think there are huge markups in some areas that need a lot of leaning down, eg Fletcher and Placemakers are trying to sell tools at a huge markup compared to the USA....so these will have to drop....or they will go out of business...their wood is frankly awful....Ive given up buying there.  In others, say TVs there isnt much of a margin now...I just look at retail goods (non-food) and I see prices at best level....hard to determine with perm sales on....
Funny thing but its the Central banks mostly saving our necks from worse....becareful what you ask for.

Infaltion: expansion of the money supply leading to an increase in prices. Cause and affect that people get confused with.
Printing money will solve nothing while creating major problems and inbalances. If there were positive outcomes in printing then why would we bother going to work? Prosperty does not come from a printing press. End of story!

I agree.  Creating money from thin air shows utter contempt for those who work for it.

 I can find many different definitions of inflation, and the worst is the CPI IMO. Some definitions are better described as causes, other are effects.
I choose to view inflation by looking at the effects on saving vs borrowing, combined with a description of money. I describe money as a proxy for time energy and effort = labour. Inflation decreases the current value of money over time, and makes borrowing more valuable then saving.
Labour done, is more valuable then future potential labour. So money today should always be more valuable then money in the future, which is how people view deflation, which to my mind is a much better way. Because labour done in the past, represnts a reduction in future labour, simple eg. if I mowed the lawn today there would be less grass to mow next week.
Creating money out of thin air reduces the value of past labour, because it does not represent past labour. Therefore increasing the money supply is inflationary. Thus savers are harmed, and borrowers recieve the benefit of past labour, in exchange for a promise to labour in the future.
Without inflation, savers retain the value of past labour. Therefore it becomes sensible to labour today, and store the labour in money. This rewards savers, and makes borrowing a risky proposition.
In a situation without inflation, you would not have debt. Instead you would have savings.

All that being said, the system is based on the assumption that there is potential labour to be done. With technology forcing more and more people out of work, the amount of labourers required is decreasing. Without the requirement for labour, how can people save?
Monetary economics all have the flawed assumption that there will always be labour for everyone to do. Which was true in the past, but is becomming increasingly less possible now, and will not be true in the future. I see no bright future in monetary based societies.

but if we accept money as a store of labour or work (and thats pretty valid) then surely the financial industry is doing more to destroy the value of work than inflation? Interesting comment I saw this month, someone estimated that the financial industry is in effect taking all the value from ppl who actually make things....
So when ppl say its workers v employers, that is incorrect, its employers and workers v the financial institutions.
"the system is based on the assumption that there is potential labour to be done", well that isnt allowing for greater specialisation, ie different jobs....which allows a more complex and larger society. Take ppl with IQs of say 120+ out of the fields as energy allows the remiander to still produce enough food and those ppl invent / do things that make life easier still...and everyone will have more children
The problem is the ppl with < 120IQ are still being produced in a ratio that is incorrect for a more complex society.......So what do we do with them? well a life on the DPB seems the "best" answer so far....ie re-distribution.

I suspect that with real hard money, we would see the fall of the financial industry, because all forms of leverage would become very risky, saving would be rewarding, without being risky. 
The improvements to living standards have all come from technology, so we really do need as many people as possible working on that.

Bernard, if you are going to look at history then you should at-least consider the relationship between Fiat money and the guillotine.
Fait money systems have come and gone with an average life expectancy of around 50 - 60 years before the beheadings begin as the system is inherently corrupt for the people.
But this time it's different? No, it's not.
"We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order."
- David Rockefeller

Not so fast for the NWO and David Rockefeller yet RB.... I'd hardly say its in the bag for them... They need to enforce gun control and restrict/control the internet yet. Or haven't you taken into account that the police in the US are out-gunned 80 to 3, many of which are trained combat veterans more heavily armed than the police.... not good odds for the NWO if I was a betting man.... and they have to get nations to agree on a new monetary system that they will control (not something they are close to doing btw)... and they have to do it before the old one, which they also control collapses...

The IMF has been chipping away for a while now and each month the $US retrenches as the worlds reserve currency as more and more countries elect to trade in other currency.
As for your comments on guns I have yet to read of a single banker in America being shot which goes to show that bankers can rob every penny from the poor whose bullets are useless without a cause.

1. The IMF, [also referred to by those in the know as the US Treasury Department], yes has been to some extent doing that.... the Shanghai Economic Co-operation Pact has been doing more.... still the USD has life left in it for a few more years yet so don't hold your breath... it is so entrenched.... there is no replacement on the horizon (and certainly not the euro)... when its time comes, as it will, it will not be replaced by another unbacked fiat $ as by that time no one will accept another countries paper money...
'Other currencies' do not equal another/replacement reserve currency RB... fyi neither does the SDR... already tried and failed before (late 60s).... NZ and Australia have used each others currencies in trade for many years, no big deal.... other currencies don't have the depth in the bond market the US does (which is much bigger than all the world's stock markets rolled into one)... there is much more to a reserve currency than just international trade... don't forget China has pegged its currency to the USD so using its own currency for trade when its own currency is dependant on the USD isn't the big deal people make it out to be... can't see the renminbi or HKD free floating any time soon... can you?
As I have said before the new reserve currency may well be a new USD gold backed, or partially gold backed... most currencies don't have anything like the gold to back their currency and certainly not the size markets behind it... maybe a new one world currency - although the powers that be are having trouble just holding the euro together - good luck to them if they think they can do it with a couple of hundred countries... what a joke - it will never be accepted, not by China, nor Russia, nor the middle east,...
2. My point is that as more and more people wake up to the scam eventually it will reach critical mass. You can't have a police state (which is what the NWO want) without police, and there are many police and miltitary personel who will not go along with it, even if it means violence. We are in early days yet. Most still sleep. If it came to another civil war in the US or the world - the NWO are out numbered like a million to one, not good odds really... they are insane if they think they can get away with a leveraged buyout of the world funded by truckloads of taxpayer debt... take their house away and people will not fight, take their freedom away and that's a whole new ball game... you have to understand US culture - they worship freedom over there...

"you have to understand US culture — they worship freedom over there..."
What bollocks 1 in every 100 people are in prison, while the official unemployment rate is 8%  the actual rate of unemployment is closer to 16% (unemployed stop being unemployed after a small period of time even though they don't have a job), and two out of every three people don't even hold a passport so cannot even travel to Canada.
Americans don't currently have freedom so you have no point.

Well we all have an opinion don't we?
Actually unemployment is closer to 22% if you measure it against the potential workforce available... my opinion is the US is heading for revolution if all available legal channels get closed off (which they slowly are) - that's what history teaches RB, so I wouldn't be so quick to write that view off. If you think they will just let the corporate facism rule and come into line easily - thats fine, others like me have a different view of the future, and history supports my view as normal...

The Q is what will the "new World order" be.....
In effect I dont think there will a single world order that takes complexity which takes energy. So within the energy constraints it will be each nation inward facing with minimal connectivities to other nations due to the costs....so 156 of them all the same, ie all doing thier own thing...

The sabre rattling is getting louder.  
Time to become our own central bankers.  
Time to understand that our miniscule NZ currency holds no intrinsic value over the rest of the world.  They are just coupons to be exchanged between nzers when on nz soil.  Nothing more to the stuff.  0s and 1s digits to be created by banks and governments at will.
We can't lick them thar digits of the screen for nourishment!

When everyone has had it brought to their attention that they must hold other forms of wealth or savings, only then should the government, central bank play around with their plaything which is their pretty little coupons!

"Time to understand that our miniscule NZ currency holds no intrinsic value over the rest of the world."
Our money is backed with what you can do with it.....so we have resources and some energy....NET.
ie less ppl than what we produce....so yes "They are just coupons to be exchanged between nzers when on nz soil."
Is very apt...

Lower the FX rate to help exporters and build more houses solving the housing shortage and bringing down the cost of owning? Sounds good to me.

Iain - where are you ? This is the closest Bernard's got yet!

The printing of money will not work to fix problems, it has not worked before (ever) , It can not possibly work & it will not work (ever) as the laws of maths (even those taught in our NZ schools) simply prevent it.  Printing money may make the here & now feel good & score some more votes but all it will ever do is screw all those who will follow us, as it has always done. This is not rocket science, my 8 year old son can smell a dirty rat when I give him $5 for washing the car & then my neighbour comes over & photocopies that fiver it & gives it to his boy for doing nothing all day so that the boy can go & buy a big mac.  I wonder if Bernard is touting for business with this post, he has succeeded if he was – latest count is 50 replies.

um, no, to start with there is no such "law" in maths, at best we have a mthematical formulae that can describe something in the real world....the effect of gravity for instance...so you are talking total rubbish. You then compound it by spouting the religious dogma of voodoo economics.......
In economics there is such a precedent that has worked, its known as the zero bound problem and it was disceted and "solved" by Keynes.  So a success was govn spending in the preparation of WW2 which is what dragged us out of the Great Depression, and today with the Fed printing is what is probably (so far anyway) stopped us going into a 2nd Great Depression.....though marginally.

"Unsustainable solutions, are not the answer to unsustainability"

well said  - "truth hurts don't it"


Well Burnard, I have waded through all of the above,...question, what have you been smoking? What NZ needs is a true visionary.... Till now I thought you may have filled them boots, wooops, seems not.....com-on mate you are better than this.

...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...

Ben Bernanke (better known as ctrl+P) 

I agree with you Bernard. We have two tools that will work to help shift our economy today. QE and lowering the OCR. Both of these are in our power to do while most other initiatives are pointless and ineffective in the light of NZ's tiny presence on the global economic scene. Why are Bollard and English not talking about this?

Yes...u have commited heresy..!!     :)
U talk about inflation...  but u do not define it. ( in different economic schools of thought, inflation alludes to different things).
I'm not being pedantic.... and I don't agree/disagree with u...BUT  defining inflation is critically important to understanding and measuring the effects of "printing high powered money out of thin air"..
For the sake of your argument above ..can u define inflation for me..
Many thanks  Roelof

I totally agree.

part of that explanation is ppls perception of inflation...so if ppl expect inflation it becomes self-fullfilling....assuming there are enough of them.
So giving a tax cut or increasing an operating expense by Govn means there is permanently more money being put in the system, its "clearly" inflationary. A one off tax cheque or new works on the other hand is not, as there is no expectation that it will be repeated.
So printing money to rebuild where its a one off is not likely to be inflationary...of course the road to hell is, its never a one off....there is always another good reason that a Govn can come up with to print yet more once its started.

I'd say the bottom is in, for US housing. 

So you are saying US housing will drop no more?  give or take a few % over say the next 6 months?
A very bold statement if so.....

Yep exactly, US house prices are with 3% of the bottom, less I'd say, but definatly not more.  I'm not saying capital gains are comming back, I'm saying capital losses have stopped.  So it's safe to go and buy a nice cashflow earning house.  The gold/house price ratio hasn't quite bottomed yet, but that will come more from rising gold prices, the rent/mortgage ratio has more then bottomed, it has had a big overshoot.

Its dawned on Liam Hallihan at the UKs Daily Telegraph. Its not primarily about the debt, nor our response to that debt, its not even about whether to print or not to print - its all about PEAKOIL.
Very refreshing to see such an article in the DT which has its fair share of the denyeverything wingnut fraternity in its readership.

They have printed so much, that the price of oil, in pounds is at record highs.  This is not the case for countries like NZ or Australia, for whom the price of oil is well off its nominal highs.

So nothing to do with demand outstripping supply.....lets forget about geology its just because others are printing......
yeah right.

Steven old bean, you have as much chance changing the mind of petrolheads as the Austrians have of winning over Keynesians....look after yourself mate and let them run out of energy.

If it was a matter of supply/demand the oil would be at record prices in all currencies not just EUR/GBP.

Its really simple, unless you extract that money from the system first, the problem with printing money is that its ALWAYS inflationary once monetary velocity picks up again (and it eventually will in the next few years)
Printing and putting money into the system has really nice initial benefits for everyone, taking it out does the exact opposite - and guess what, central banks are therefore historically always been too slow to take it out again, and accordingly history shows you end up with either hyperinflation, or heightened inflation. - eventually much higher interest rates and implosion
Part of this problem globally has been the central banks (Greenspan no. 1), and to suggest we implement a strategy that trusts any central banker to manage it, is more than heresy, its stupidity. There is only one reason why several countries have reverted to it, they're buggered when  you cant take interest rates below zero to any extent. Unless Bernard is comparing us to the southern european states and the US, UK etc, the suggestion is actually ludicous. That said, yes it does put huge upward pressure on the NZD, and if that becomes an unsummountable problem other ideas will need to be considered - but although we have getting a big variance between what export industries are doing well curerntly,  and those that are not (and we can never have it perfect for all), our export peformance is still strong currently i.e. we are not at that same stage of desperatioin that Bernard at times would like to make out it is

Quick question, what is the mechanism by which the central bank can directly add to or subtract from the total money supply? This would require them to adjust reserve ratios or something wouldn't it, which they do not even set at present, and I doubt it would work anyway myself if they did adjust them.
Want to see Alan Greenspan saying that the Fed has never been able to adjust the total money supply,
According to MMT it would be the job of treasury to add or subtract money. Probably by paying down government debt in the good times. I remember Michael Cullen was not very popular with some people for holding up tax cuts and paying down government debt instead.

POMO, LTRO, QE, Repo, Refi, etc.  Central banks have assets with corrosponding liabilities, to expand the money supply they buy assets, to contract it they sell assets.

Thats obviously not Alan Greenspan's position in the above testimony. He says pretty clearly that they have not found a proxy for money. This means that they can't identify the way to control expansion or contraction of M3. I take it that it is an article of faith for Greenspan that such a thing exists. But I see no reason to believe this would exist in practise.

The Chairman of the Fed cannot define money.  What he says is that M3 is not a definition of money, he does not say they cannot control M3, clearly they can, because they have direct controll of M1 which is included in M3.  An increase in M1, directly increases M3, and he does not deny.
M3 = M1 + M2 + all other deposits and forms of money not included in M1 or M2.
You have to realise Greenspan invented Fedspeak, or Greenspeak.  Which he defined as "when you don't want to answer a question, but you don't want to say "I'm not going to answer that" you give an answer where you talk about a lot of complex things and confuse the issue with things most people don't understand".  I paraphrased a bit, saw it on youtube a while ago, but thats baisically what he said.

Actually he says pretty clearly in that video that they will never try to control M3 because it includes commercial bank credit, etc... Go through it again. In this context I am going to take 'Fedspeak' to mean you don't understand what he is saying but its pretty clear to me,
What Greenspan (and apparantly you) believe is that there should be a 'proxy' for money. That is there should be something which the fed can manipulate and with measurable cause and effect and probably a time lag, hey presto, the inflation or deflation effects pop out the other end (hence you can measure your effects and control of the money supply). I do wonder why Greenspan still believes at this stage that this exists when he and his staff can't find it given all their knowledge.
The reason such a thing is suppost to exist is called the money-multiplier model of banking, but I have seen several studies which pretty clearly prove this model doesn't work for money and banking. In practise there is no mechanism to control commercial bank lending and it just happens or doesn't.
When he says he cannot define money he is also correct. What he means is its defined through a formula based on prices and inflation/deflation. So what ever people use for transactions that is money and you can't measure it but basically the prices allow you to determine what direction its going. Since you can't separate the velocity then you can't measure the total amount of it either, just if thats expanding or deflating and the rate of expansion/deflation.
He also says, and this is absolutely clear even in Fed speak, that he tried to measure M1 and that is not a proxy for M3. The only reason M1 increases or decreases M3 is because they both include M1 but this is marginal as is M1 relative to M3. So no M1 does not allow control of M3. If it has a significant influence then QE (which has been huge) is about as effective as you trying to push a bull around a paddoc. It only works when the bull wants to go where you want it to.

This means that they can't identify the way to control expansion or contraction of M3.
Actually he says pretty clearly in that video that they will never try to control M3 because it includes commercial bank credit, etc
 Seriously I heard what he said, and you need to listen to the exact words, he isn't lying, he is evading the question of whether or not they will controll M3.  Ron Paul summarised "you can't control something you can't define".  He didn't say they couldn't or even wouldn't control M3.  He said they can't controll money because they cant define it.  Which is different to saying they can't controll M3.
He never says M1 is not a proxy for M3, he is talking about finding a proxy for money.  Go through it again if you must, and tell me what his exact words are. 
If M1 is 6% of M3, and 50% of M1 is held by the Fed, then the Fed triples the size of its balance sheet with Large Scale Asset Purchases, this increases M1 by 100%, and increases M3 by 6%.  Which is above the target of 4.5% increase YoY.
Now the "leverage" applied by fractional banking has gone from 16.666x to 8.3333x hence this is called "deleveraging". 
So QE has been effective both for deleveraging, and maintaining growth in M3.  Many farmers who work with bulls are competent, and experienced, they have little trouble controlling bulls.

I will admit you can correct me on one point, he doesn't determine M1 is not a proxy for M3, he determines its not a proxy for money.
However Greenspan does define money, its defined through the following equation
Where M is the money, V is the velocity, P is the price level and y is the physical turnover. Through this you can apparantly work out if M is expanding or contracting by measuring P and targeting inflation.
By definition all prices are indeed the ratio of an exchange of a good for money and what we seek is what that is
He also says that the Fed has not managed to work out what the relationship is between the M1 and M2 and the M in the above equation,
The problem is we used M1 at one point for the proxy for money and it turned out to be a very difficult indicator of any financial state. We then went to M2 and had the similar problem
He also says that they would not seek to control M3, because its bank credit.
We’ve never done M3 per say because it largely reflects the extent of expansion of the banking industry and when in effect banks expand in and of itself it doesn’t tell you terribly much about what the real money is so our problem is not that we do not believe in sound money, we do.
First of all we should understand the reason Greenspan considers the bank credit expansion not relevant. Here is Bernanke explaining the underlying argument,
Fischer's idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.
So if this is true then bank credit has no effects on the total amount of money. But there is pleanty of evidence that M3 is relevant, due to the actual way in which banks create credit. In this case the reason the pricing equation is not working for the Fed (through which they would identify a proxy to control money with) is that there is another factor, the growth and shrinking of credit. This could be equally causing inflation or deflation as much as any government spending or Fed monetary policy.

And The Bernanke (aka ctrl+p, Helicopter Ben, Chairsatan) had this to say about creating inflation;
...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation...

Ben Bernanke 2002
Deflation: Making Sure "It" Doesn't HappenHere
So there is the distinct possibility that using a printing press, increases the amount of money in circulation, hence positive inflation.

How does this work? Is Helicopter Ben actually going to fly around dropping the money from the sky? How does the money get spent into circulation?
QE doesn't work unless there is demand for credit. You know he might have changed his mind having tried it and seen the results.

"QE doesn't work".....well it's an improvement Nic...keep working on it!

I doubt he has changed his mind, the economy is growing, and the PCPE is where he wants it for now, and if that changes, he will print more, "if at first you don't succeed, try and try again" right?
If you say it hasn't worked, what has it failed to achieve?  Technicaly Bernanke has achieved the dual mandate, unemployment is falling, and inflation is on target, in the face of the biggest bankruptcies and cascading defaults in history.
I'm not saying he did the right thing, but if I was him following his mandate, whats the problem?

Mind that hole skudiv...no that one in front of you, dug by the spin doctors hell bent of conning the us peasants into believing recovery is underway...it isn't.....us employment data is skewed to the happy side....a detailed look reveals the truth.
There are still millions of properties to be smashed in value on the foreclosure market but the banks have kept them hidden to cook the data.
There are heaps of local govt regions that are bust..totally utterly bust.
The us deficit is past the Moon and expanding at a greater rate...no sign of it stopping...
Petrol up 10c a gallon and the locals are screaming for blood....sure is some recovery they are having.

I know Wolly, just having a bit of fun.  They should have used Greenspans "solution" and burnt down a whole lot of houses.  Imagine the boost to the economy from the rebuild.
Sure from a rational viewpoint QE doesn't help many people, only a few at the top of the banking heap.  But why attempt to be rational in a world where printing isn't inflationary.

I guess your reference to Greenspans solution was in jest, but the US public transport infrastructure could use some work today without needing to smash the place up first. Problem is the 'market' doesn't want to invest in it, because they can profit more short term and else where.

You know you are right, and the QE based bailouts have had an effect, which I didn't highlight. Maybe you should ask Olly Newland what happens when you own a financier credit which you can't pay. If the Fed had not bailed out many from the Wall Street bad bets in the US, it seems very clear the US contraction would have been much much sharper. But each time these guys (many of who really did commit fraud) get bailed out then you are turning the economy into a plutocracy. Every time you need them to be benevolent you have to go an smooth over their bad bets with another bailout. Wolly is onto that exact idea in his reply.
Thats the problem, by acting for only one side the economy becomes more plutocratic.
There was suppost to be a compromise in fact, when Wall Street got bailed out they were suppost to lend. It really was utopian idealism to believe that would happen.

Ah ok this is a hugh improvement....so once we are out of the stagflation/deflationary period we will probably see inflation and significant inflation as well? Now this scenario is way more plausible....possibly not a big % in chance as it assumes a recovery....and in a few years....if few is 20 to 30 and most likely never, OK.
So the very first Q is if we see deflation first then cash is king....while we have a drop....can you accept that's the right strategy?  IF we get a drop? or are you still saying gold and commodities is the pace to be in deflation?
Today is fairly unique of course in that the printed money is sitting in bank vaults and what has "got out" is minor compared to the contraction in spending...so in theory its easier for the central bank to suck it back in......
I dont see anything wrong with employing a central bank/banker the problems is a) The govn that appoints him/her and b) the actual person.  Greenspan was clearly quasi-libertarian in his views and dogmatic in his monetary outlook, he single-handedly has buggered the world economy with his "put"....ie
"they're buggered when  you cant take interest rates below zero to any extent."
then we have the voodoo economics of the Reagan and post-reagan era......
Once we get tothis zero bound Greenspan and his ilk have no methodolgy to get out.....at this point Bernakie is rverting to classic keynesian and saying QEing is the only known way out.....which appears to be correct.
The problem is Govn(s) are hell bent on austerity....so without active prevention of Deflation with govn spending on one off projects and CB printing we will get deflation and a Depression....it is only Bernakie's last ditch desperate efforts of QEing that has held it off....so far and he's pretty much spent....then a Republican Congress will be in ascention and well, its all over.

The trouble is snippy, Bernard sees NZ like a tiny island where everyone is into fishing and the export of fish is the major earning tool...and Bernard laments the fact so many sit on the beach to watch others do the fishing..the many receiving almost the same income by way of benefits paid for with taxes taken from those fishing...Bernard worries about the people on the beach...he worries awful hard about the export returns...he thinks QE can provide new boats to give jobs to those on the beach and that the new boats with new crews will boost the export earnings...
Bernard forgets to think about the dwindling fish stock....he knows nothing of the Law of Dimishing Returns....and so he fails to understand why QE would be a fabulous failure.

A fabulous failure sounds good compared to a dismal failure.

Fabulous failures in govt policy lead to gongs for the goofs and fatter salaries!

Oh Snippy, but in a fiat system the government can spend money it doesn't have (it just steals it from paper savers and those on fixed incomes - without them even knowing!)... which is why at present they have no plans or motive to return to a gold standard, until it is forced upon them - like I don't know, - the arabs wanting gold for oil perhaps (rather than USD or any paper)?...
Given BHs comments I think its high time for the RBNZ to convert its foreign reserves to gold and take delivery.... the sooner the better...

Good thinking Bernard. Lee/Savage had the advantage of more resources, more greenfield opportunities, and a down-energy system (closer relativitiy to manual labour outputs), also a lesser control of processes by a very few global companies.
Money has to de-value from here on, rapidly - demand/scarcity says it must, so you'll be paying folk less than they think you are, compounding. It's been going on for 40 years now, so why not?
Employment?  I don't care about work or employment, but giving people buy-in to your society, reduces their tendency to trash it, with all sorts of good spin-offs.
No point in just 'rebuilding, though. Building for sustainability/resilience on the downside of the gaussian, is the only valid goal.

I agree Bernard.  It is time we tried to stop reinventing the wheel.  If we look to the past we we can find the answers for today's problems.  Yes they will have to be modified because today's times are different but not that much.  If the Reserve Bank lent the money for infrastructures that actually got private enterprise going then that is good; for it to lend for private consumption viz imports from China then that would be stupid.  I cannot see how borrowing from foreigners is good but borrowing from our own Reserve Bank is bad.    However Wolly had a couple of good points:
"Second matter for you work on: How would overseas bond markets react?
Third: What would the consequences be from that reaction?
Four: Would the consequences be far more damaging to far more New Zealanders than any 'benefit....
I imagine Britain was furious when the Government instructed its Reserve Bank to lend to the State to build houses.  I wonder what it threatened to do.  Hansard might tell us.  But obviously what ever Britain threatened to do we rode it out.
And anyway the world didn't come to an end economically after WW11, in fact the reverse, just because they actually printed money, like mad, during the war and after. Germany's debts were wiped post war.
Thanks to rcpa I suggest you read moslereconomics.com to understand what actually happens when money is printed.

My take after eliminating the outliers (Tribeless & Co) would be that since US, UK , China Japan have already done their bit of money printing, the ultimate cost to NZ is our ragingly high exchange rate which has a caustic effect on our future.
We should follow these countries and use the cash for infrastructure etc. Even Tribeless would recognise that copying them only helps restore the balance. Rabid opinion may like their BMWs at a lower price than justified by realities of our real Economy but the correction will come. It is just the route to be taken that is not yet clear.

In passing I wonder what would happen if a Tribeless (The real one) had to exist in a NZ filled with another 4.5 million other Tribelesses and not by actual people he/she could walk all over and suck dry.

I'm all for a bit of Keynesian stimulus if there is surplus capacity. But once again savers are penalised because others in the economy can't live within their means or are already loaded up with too much debt. It almost makes me want to borrow some cheap money and buy some gold, a house, or some other hard asset that probably doesn't earn much income. Is that a good thing?

No......when we go into a depression assets lose value.....housing could lose a un-believable amount...gold may not do to badly but if cash is going to do better why not go for the better one.
Now once at the bottom then yes move cash into assets. Housing would seem to be one of the better buys.....it fufills a real need and has an income...gold doesnt.
and yes there is huge global over-capacity...
Savers are only penalised if there is inflation....if the printing keeps savers in jobs well they are not as badly off as if they had lost their jobs....its all relative.....
So I'd suggest avoiding debt...but as an adult its your call.

The traditional reason why small countries at least dont print money is that it is inflationary ( more money , same amount of goods, higher prices ) and because it reduces confidence of those who hold our existing debt and fund  our lifestyles/ development. This affects the value of our currency and can get us into a nasty inflationary spiral as a lower currency increases import prices. It might be different for large economies because they are not as exposed to international influences.
Bernard does raise a point worth thinking about. Does the extraordinary event of the destruction of Christchurch and the ( as far as i know ) unprecedented  since WW2 intentional debasement of the currencies of our trading partners mean that the situation for us is sufficiently different to cause a rethink of economic orthodoxy?
I wish I knew the answer. The danger does seem to be letting loose the inflation dragon and also handing politicians a blank cheque with which to buy votes. We might also trash international confidence in this highly indebted little country with consequences which might not be able to be turned around. Worth the risk?

Waripori, I spoke with the NZ head of Tower Investments a couple of years ago - and suggested NZ QE - he basically said the same thing. NZ is too small to get away with it, even the Australians are too small, if overseas investors lost confidence in our little currency it would be into the toliet our currency and economy would go and there's nothing anybody in NZ could do about it... BH doesn't mention this unintended factor.

mmm, I'm not sure about it either but it certainly got some debate going
economist, what are your solution/s?
me, I don't think there are any magic bullets that will get us back up to regular over 3 % growth.
A number of smaller things can be done though to keep us out of the poo, and maybe get us growing a much more realistic 2% per annum over the longer term. Nothing spectacular, just the "new normal", I'm afraid
Some rather negative employment news coming out of NZ these days, whether govt or private sector. Time will tell whether my prediction dating back mid / late last year of unemployment climbing close to 7% (versus most economists 5.3 to 6%) by year's end comes to fruition
The govt's policies (or policy absence) seem to be directly / indirectly placing pressure on unemployment  

To be blunt Matt in Auck, I don't think there are many solutions, this is a problem the government's of the world can't solve, and one they are trying to but in the end they will make it worse. As an investor I'm sitting on the sidelines and going to gold and silver and the mining shares. Its real long term investment that creates jobs and wealth, not government 'interventions' or manipulated markets. In the US the FED the sharemarket goes up with bad news and falls with good news, it's crazy - its because with bad news the chances go up the FED will come with QE bigger and sooner, with good news the FED will come with QE smaller and later - the FED has turned investment markets into largely a giant casino - not generally the place you want to put lifetimes of savings...
For the record I think the world is heading for a depression either way, all they can do is delay it. I think it will end up an inflationary depression followed by a deflationary collapse, then things will start over again. All you can do is protect yourself best you can, get to know your neighbours and community and be thankful you don't live in the UK, Europe or the US.
NZ is actually a resource rich country, one of the richest per capita in the world (arguable the richest per capita), the people here don't see it for a number of reasons though. We could have so much wealth here it would be coming out our ears but the government squanders it and the looney greens don't care. Just the coal resources in NZ alone would be enough to pay off every foreign debt we owe... thats just the coal... we have much more - the government knows 100 billion is sitting on 0.7% conservation lands... thats 0.7%.... NZs 4th largest export is oil and we have barely scatched the surface... we produce food like no other country when food stocks are at multi-decade lows... we are way away from any potential wars.... we have lakes and rivers for electricity generation that we just let water go by... I was talking with a consultant to Rakon this afternoon - since Rakon moved production there due to lower wages (and bigger profits) the Chinese have doubled their wages - it would have been better if they stayed in NZ instead of spending 70 million to move to China.... and this is just the tip of the ice burg Matt.... I could go on and on and on with story after story after story.... We have a moral problem in NZ... where welfare is a career choice... (most NZs aren't against helping other in need - my wife and I went to CHC with the sallys to go door to door following up needs assessments - money was the least of people's worries and we had plenty to give).... my friend Colin Craig has tried getting in to make a change for the better but the system is too entrenched...

Ah yes solutions - well impose tarriffs on counries with slave labour rates for a start (and the US should do likewise - that will go a long way to bringing back some of those 8 million jobs and 42,000 factories sent offshore and outsourced from the US and it should also end tax breaks for taking jobs overseas - I mean thats just nuts - but the deliberate gutting of the US has been planned for years... it's not a economic problem).
In NZ our banks don't lend money to people who can't pay it back so as long as people have a job they will be fine... and house prices thus will be fine....
Go back to gold as money and end the power and need for banks as we know them today (too radical for most people even to understand at this point) - that would go a long way to bringing back savings - that would mean recinding the IMF member country legislation passed in NZ, and while we where at it pull out of the WTO too....
well I could go on....

Waripori - there is always a good reason or excuse to find to print money, but there's a damn good reason why its fortunately rarely done. To follow others, just because they're doing it, really smacks of the western world's borrowing over the last three decades by Govts and individuals who can not think for themselves - but just because others did it doesnt mean youre not going to be decimated as well, as many have found out during the GFC so far
Its not done because its bloody dangerous and inevitably causes way more problems in the long-term than it seemingly cures in the short-term - even a small bit of research on financial history shows that. But of course its different this time, we're all so much smarter than those previous centuries of people who blew themselves up ?

BH - so dispite all the stuff you harp on about the mal investment in property - you are now providing reasons that anybody who invested in housing has infact made the right choice and protected their savings.... ditto can be said about buying gold (not the ETF - the real stuff).
Unfortunately the same can't be said about those with hard earned savings in term deposits in the bank... is it any wonder no one no sane alert person wants to save cash in this country?

Yes - same for silver snippy - but its more volitile. You might want to follow the following blog:
becareful of leverage.
RE property - we will have to wait and see. In the Wemair case overseas students studing there with an allowance from overseas bought a number of houses with their study allowance when the exchange rate collapsed (When Money Dies:The nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany). So yes, historically the precious metals are saver but they are heavily suppressed - gold - to keep down the LIBOR rate and therefore all interest rates...

Economist - I am anxiously awaiting Bernard's response to the inconsistancies that you point out in these comments when compared with his previous ones.
In fact now that he's suggesting money printing as a viable option for NZ, I'm awaitinjg his detailed anaylsis as where we investors should now invest our money if this comes to be, and exactly what should happen to each investment type thereafter .

1. Who and how would you police them being their for 5 years? What if they had to sell as they lost their job? Hardly seems fair to penalise them and knock them while they are down, I'm sure most NZers would agree. Housing will always be expensive in AKL, you can buy a rental and fiance it now for under $100 a week and use your savings for a house to pay down the mortgage, that's the best way to own a first home, when the mortgage is manageable move in yourself.
2. They will move there anyway before AKL chokes, the incentive being to avoid the choke. People are already starting to work more flexible hours - the last thing the government needs to do with taxpayer money is add extra distortion into the market...

Grant A - don't know how long you've been visiting this site, but some of us have been pointing out for a long time that 'investing' needs questioned. It worked during the time of expansion, in physical terms. Nobody has disconnected 'wealth' from the real underwrite, which is the resources of a finite planet. Notice what the Nats are doing, they wouldn't have to if money could magically make money.
So at the peak (and for many resources we're there or thereabouts) of supply of any given resource, you are at the point where it must reduce in supply. Work that backwards, and it means that 'investments' on average, have to lessen in value from here on. It's so hard to get folk to understand that what may have held true for a couple ofhundred years, can't be expected to hold forever.
(the 'scenario 2' graph is the one upon which all 'investment' decisions should be evaluated).

Investing - 'It worked during the time of expansion'. Work that backwards and it means investments have to lessen in value? Huh? So if you believe PD we are at peak on many resources you should be investing in them as reduced supply will increase prices, increased prices will incentivise more exploration and make higher cost projects profitable squeezing out more supply than would other wise be the case (assuming markets are not manipulated though).

huge problems with your understanding of,
a) economics, money is a proxy for energy....scarce resources cost energy to extract and not money to extract. Therefore when it costs 1 barerel of oil to get 1 barrel of oil out of the ground, refined and to transported to point of use there is no point in extracting it.
Whats so hard to understand whether the oil is $100 a barrl or $1000? money simply doesnt matter.
b) Our entire global economy is taking cheap raw materials and truning them into expensive finished products..it doesnt work when raw materials are too expensive...
A classic is oil, at 450USD a barrel with have expamsion, at $80USD we have stagnation and at $100USD with have recession....
So yes all your investments will lose value as an average...and are in terms of oil....example houses will be worth somewhere between 50% and 90% of what they are worth today.....trying to get my head around just taht one aspect of deflation and depression is mind boggling alone.
SUVs well worthles, yes cost $60k? + today....in 10 years time, worthless...
The investing part is in the past now....resources have been scarce for 1 to 2 decades....
Ive seen your thought process repeated time and time again with the worthless taking heads on the likes of cnbc......6 years ago, well OK....today there is really no excuse...
Really you have no idea....if you are an economist your view off the "art" is very limited to just one sub-theory and its voodoo....and then you fail on maths, science and geology.....

I think you miss the whole point steven.
If you believe as you state then the price of oil will soar in value before it reaches 1 to 1 (not go down in price as you inferr?), at which point then you sell (or actually before that point), the question is over making money by investing...
I don't know where you get your houses will be worth 50-90% from? (it takes resources to build them), as they print more money, that money will be chasing fewer and fewer resources - which is your argument btw - and you are saying reducing the supply (for whatever reason) will reduce the price (if that is what you are saying?), not likely I think. The market will just bid up the price so people who can't afford it don't get it, that's the way the market rations out shortages.
Money - in one form or another will matter as long as we live in community and transact/trade with others - whether we have oil or not. What is so hard to understand about that?
Actually I would say I have a pretty good idea and have been following this for a few decades now... and actually I came top in maths, science and economics...

No, you are thinking in terms of money / gold and not energy.....and of course supply and demand play a big part.
You can see the effect in July 2008....oil climbed in price until the global economy couldnt pay the price and the economy collapsed, so then did the price of oil...
This will play out time and time again over the next few decades.
Houses should be worth no more than 3 times the salary..... if I earn $100k my house shouldnt be worth more than $300k....yet right now we have 5.5 to 1.....so that house is "worth" $550k, yet no more vlaue was put into it to take it from 300k to 550k....
So no its not worth 550k.
90% loss comes from Stoneleigh's talk on whats coming based on what happened in the Great Depression....that was as this is a credit event......at that time taking on debt was either not possible (no one was lending) or un-economic....(it cost too much to buy a deprciating asset)
So from the 3 to 1 it looks like a 50% over-value, however in a depression my salary will also decline....so the future value of my house will reflect its value in my future 3 to 1 earnings....hence 75% doesnt seem un-realistic.
Money is a proxy for energy....and yes it will matter...however....if I have food and energy swapping it for a shiny metal makes no sense unless I can see abundance/adequate future supplies....in extermis....
I wouldnt say you dont have any idea on "maths, science and economics" or are failing to apply...I assume its the political / economic blinkers, but as we can see with the price of gold you are far from alone.
"and you are saying reducing the supply (for whatever reason) will reduce the price (if that is what you are saying?), not likely I think."
Look at what the price of oil did to the economy globally in 2008...and where the price of oil ended up as a result....

Oil was bid up on speculation too far too fast - which created a bubble - then it deflated, commodities often do that - which is why using leverage as a long term investor isn't a great idea. In reality the economy didn't collapse - its still continued to function.
Real value - as in demand - had increased. Land is getting less per capita (except if you count Detroit). The value is also determined by lots of factors - not the least of which the cost to build more and the sale of land - (bring extra supply onto the market) which is going up...
There is no firm rule houses should be 3 x salary. House are worth what somebody wants to pay for them - and they vote with their cheque book.
This is a lot different to the 1930s today - for one thing they are printing huge amounts of money, no one has a problem borrowing money in this country - the banks are falling over each other to lend it, government bonds find it easy to raise money....
Well you need food and other necessities, but thats not the point really - what do you do with other things? I've sold my boat just before Christmas for example and bought mining stocks because they were at 50 year lows and very hard to resist... one is up 300% pa... the question is over where to invest, after you have food and necessities? The price of gold is cheap... a day will come when the Arabs will not take USD or any paper money created at will for oil... as the saying goes - gold and oil will always flow but never in the same direction...
Yes again - oil came crashing down to where it was before it raced up - not because of it was a limited resource though.... but because sellers actually outnumbered buyers by a big margin (for whatever reason)...

To say "money is a proxy for energy" makes no sense, because that statement says simply creating money money must eventually create more energy (or energy use is what I think you mean), which as you rightly also point out is physically impossible.
No, money is not backed by energy they are not related in that manner.
Surely some of your other arguments are non sense too, if there is no longer the energy available to construct new property then the already created property should eventually increase in value (though it may fall into a state of disrepair) due to scarsity. It would end up being both in disrepair and expensive.
Its also quite likely that major energy shocks could drive investment towards local production, rather than the more financially efficient overseas production and transport model. This would probably be quite a good thing, reducing the income gap in many economies.
I think you should study some economics theory (including understanding the limitations of some theories) before trying to form an economics based argument about the future. I also think forming an opinion about what is physically happening while examining the price level is probably not good science. As you said money simply doesn't matter (to what is physically happening).

It makes frighteningly total sense,,,,get past your fear, I can see you have used logic to get to the answer because you just got to it, just you are afraid of what you have just thought through.
So if you can look at the first paragraph again, a paper dollar or a gold dollar is an IOU for future work/energy.  It comes down to I pay you for a good which took energy to make, or food, or energy itself.
Second parapgraph, yes local production, as PDK, myself and others have been saying for years, globalisation is finished, localisation is the future.  Houses will drop in value initiallly in a depression, I think a mean of 75% is probable....but yes after the initial 5 or so years drop owning existing productive assets outright makes sense...  Repairs can and will be done just highly prioritised...ipods will be skipped, roofs repaired....etc.
I suggest you consider engineering, oil-geology and the mathematical expotential function....these are based on absolute laws, economics is an "arty" description about how small parts of the economy may work.
I will certianly continue to study economics because of the translation of finite resources with infinite demand into our economic future is fundimental to making a sound decision(s).

Nic - no, you fail to connect the flip-side dots.
If you can't construct more housing (for instance) because of a lack of energy, then yes, housing gets relatively more desirable. If, though, the ability to pay for same is also hamstrung (no energy to produce/supply goods/services), then not as much can be paid. (Promised yes, but obviously trending to default).
So how do you measure the 'increase in value'?
You're right about physics vs economics - I came at it entirely from a physics/math (gaussian) point of view - then realised that fiat systems were doomed, then started to ask the question; Where to from here?
In a way, it doesn't matter. Any who expected money to magically beget money indefinitely, will get what is coming to them - less!

Money is a proxy for:

  • Time
  • Energy
  • Effort
  • Scarcity

probably more.

Effort = work = energy expended.
Scarcity is using a lot of energy to get a smallamount of a good.
so it all comes back to energy.
time....time doesnt cost anything unless its a measure of work over time... joules per second.

"Time is money"

No, time is only money when you take time to do work....if you do no work, time doesnt matter......

powerdownkiwi - all my investments are targeted at commodities - energy and gold/silver especially. I'm a believer in finite resources but understand economist's argument better than yours in how to respond to it ?

I would also add in a few things to save money, like PV solar water, maybe buy some stuff that will negate some of the rising cost of gas, electricity and food.  I like commodities, they have been used as money for all of time, because they have that one important quality that fiat doesn't "intrinsic value". 

I just looked at solar hot water on Friday, a typical unit is $7k to $8k installed and a 18 odd year payback....
If the plant lasts that long, which is a bit of a stretch....so it makes no economic sense, and tthat assumes cash and not borrowing to get it put in at say 7% in which case its plain stupid.

Steven - but what if that payback time shortens as the displaced energy cost vs your income say, trebles? Wouldnt you be better off owning the item? Surely they'll be in more demand at that point than they are now, and will be more energy-costly to produce, just at the time when your dollar is stretching less than it ever did?

Yes and no.....Stoneleigh made a very good point, if you have cash then yes buy it....if you dont then that means taking on debt to do so and if you cannot pay back debt you lose the item back to the person who sold it to you....plus possibly a lot more.
I think she is a great bigger picture person and it makes my head hurt reading and thinking on what she is saying....
So say I bought using debt, a farm, I develope it into self-sustainability....but I then have debt I cant pay, so the system takes it off me and hands it to someone who can...so all my un-accounted for effort is lost...the person with worthless paper and the Govn behind them "wins". This could carry into rates....say the council doubles your rates every year? if you cant pay they sell your property from under you.....some rich smart allic with lots of worthless dollars owns your work...or the local councillor....and such actions are not without precident.
The present return on a shws (solar hot water system) is around 18 years (with a warantee on the kit of 12 years, in say 8 years time can I get a warrantee fix? bet not). like solar panels I consider the tech to advanced to have long term....peltic water wheels, and windmills, yes...simple, low tech...renewable.
So to install a  shws would cost about  $8k, the only way I could do that is take on more debt at about 5 years duration.....now sure I expect electricity to go to 40cents a kwh inside that time which in simple terms means < 9 years.....but if Im paying interest of at least 7%....it simply sucks.  Also that 5 years means im commited to paying that back, I have no more spare money for other projects that might give a better return in that volitile period.  I think liquidity is highly important so no HP/debt type things longer than 1 year...Also I/we can live with very limited hot water....
So a better solution is a wet back wood burner, hot water, cooking and heating...they are about $1500 which I could do with cash, though some months saving for it.....technically mind they are a steel box which I could weld up myself...but then there are council regs which cost a small fortune to meet but as you i expect these wont matter inside a decade. 
Also then heavier/thicker house insulation.
So my present plan is a 300litre stainless steel mains pressure hotwater cylinder and high (150mm) insulation....should last forever....then I will move on....

I can see you do, you are of like mind, but both are faulty as I have repeatedly said....
but thats OK, for every deal, investment, bet etc there is the long and the short, we are on opposite sides....
To make it clear, I expect huge deflation, so ever asset, share, etc is going to lose a lot of value....its possible some will lose little or might gain...but really most will lose a lot, so I think its gambling, because there is no way to know....sure play lucky....
So I dont play.

OK - you have to define 'invest'. If it's fossil or finite, it ain't investment, it's a hand-grenade. . If it's a renewable source, or outright ownership of the item (a PV panel for instance) then good stuff.
The problem - the one not many folk think through - is that money is nobbut a proxy for the things it can buy. Goods and/or services. Buing one's way into 'more' money by 'investing', still ends up at that point, it just expects to buy even more.
If there is a cap on the supply of goods/services, then it's a game of musical chairs for the dollars, and the bidding has to raise the 'price'. In a dwindling-supply situation, the return on investment has to trail the price rise, and has to do so permanently.
That's on global average, there will be winners for some time (assuming the system can cope with perpetual contraction) but they'll have to be increasingly smarter than hithertofore. Clearly, in that scenario, it pays to own whatever you think you need, and as soon as possible.
I don't regard gold as much of an investment, it does electrical contacts but that's about it. Silver is more useful - a bit. Now copper; post oil (post plastic) has got to be seriously in demand.
Where's Wally?

I'd add soon as possible as long as it doesnt involve debt to do it.
Copper has to be transported to us, the biggest untapped source I can think of of PNG.....getting it out wont be easy...
Interesting that from what ive read china has been stockpiling raw materials...if I had a huge quantity of useless USD, I would use them to buy....
I wonder if they get it? ie are right for the right reason, or right for the wrong reason? probably the latter....
Anyway Im looking at the time bomb that is the EU as the shortest fuse but the USA and China are the two others....cant see the length of those fuses.......China looks very bad....it might yet blow first and take us into the second Great depression.......

Sorry, I'd forgotten about going into debt for it!
Outside the square, black alkathene in the sun works very well, black-painted radiators do better, and under glass, better again. Wouldn't do potable, too much rust, but then again, probably no more than a good olf Shacklock 501 boiling - I can remember some orange baths in my time..........
We've go an outdoor bath in a small shed, with a black-painted stainless tank overhead, in an insulated box and under glass (hatch off a subaru). Wouldn't have cost $100, and isn't part of the house.

Like the sound of your bath shed... as well as increasing your independence, stuff like that turns life into a bit of an adventure :-)

The argument for gold PDK is that it is a currency (and traded by the big banks as such). If you had one million - where do you put it? Into oil in the back shed? and how about 10 million? both of which is nothing to large sovereign funds... how about 100 billion? where do you store that? in paper currencies? People run to gold because it tends to keep its value over centuries even when the fiat money system collapses.... in a serious global depression demand for many commodities falls and gold has acted to preserve wealth...

Economist - gold has only been used because it is in the psyche. It's still a trinket, and entirely useless.
You're obviously a thinker - get a copy and have a read (I can loan you mine for the postage) of Prof Jared Diamond's 'Collapse, how societies choose to fail or survive'.
Most of the failures had gold as their major proxy, but presumably would have traded it for whatever their ultimate scarcitty was.
Where Bernard's tongue-in-cheek suggestion has merit, is when a society (NZ, Chch) need something done, has a lot of folk not doing anything, and can't pay. What he's suggesting, in essence, is that they get paid less than they think, which is what has been happening  - as you say - since fiat finance started. The problem is one of holding a mental picture the losses the fiat system imposes on you, with the seeming 'gains' from the agriculture etc which supply you. Monocultures and economies of scale and competition and specialisation, have contrived to produce the illusion of increased wealth, but they failed to account for externalities - depletion (including energy), pollution - and so the 'cheaper' was an illusion.
There's less than two olympic swimming-pools volume of gold in existence, be interesting to see what it was 'worth' as the underwrite for every commodity currently traded.

Thanks PDK - I already have a copy of that book.... I disagree - most of their failures weren't because gold was their major proxy, but for other reasons. 
About gold, although most in the west have been conditioned to think your way about gold and paper money, there is good reasons its in the psyche (and I wouldn't be so quick to write it off esp in favour of paper which has never lasted). Gold is not a commodity, its money (obviously you get the first thing as you say 'gold is useless'), the second thing you don't get - gold couldn't be money if it was a commodity and used up. The reasons for this are too far to go into without taking up the whole page.... yada yada yada
It would be worth much more if the gold derivatives market just blew up... the LBMA trades over $6 trillion in a year - most of which doesn't physically exist but the fake paper proxy serves to increase supply and keep the price down... its also known as fraud...

and silver is the second most widely used commodity in the world after oil, over 10,000 uses.

What do think would happen in Chch with a whole lot of freshly printed funding pouring in!!! Its a crazy would we live in, when printing money takes on a legitimate life! This crazy economic world of socialising losses, government guaranteed backstops and easy credit as lead us to where we are today. It didn’t work so now more is called for!! 
For me, I'm getting out of currencies and into hard assets, while this mad thinking continuers, there is a real world out there that is not caught up in schemes to save the day that will only create unintended consequences causing even bigger problems.
Don't be fooled into thinking economists know what they are doing!! They thought the economic management of Cullen was great, when it was only a debt fuelled boom that could never last. Consumer spending cannot be returned to pre 2007 levels, because the assets that funded the borrowing that supported it, are deflating. Like any up and down in a market it's not linear, don't be fooled by short term blips in the trend, created by further government borrowing propping up the economy.

Steven - think about your assumption regarding deflation. Other than for a couple of months at the height of the GFC in 2008, there has been no deflation anywhere in the globe in 60 years ie. since the world moved for the first time in unison to fiat currencies only, with no hard asset backing, over 40 years ago, there has been only INFLATION. 
In the past 400 years there has never been a period like it, it sticks out like dogs balls on a chart. Do you think it might have something to do with the fact that every time there is a credit crunch, and deflation on the way, central banks have been able for the first time to flood the system with cash and maintained inflation.  They've done it again in the last three years in the face of one of the biggest credit crunches since the last depression, and yet still we have no deflation
We will get it eventually, but not before the whole fiat system falls apart. But that could be years away yet, and in the meantime, those cashed up hoping for delation and earning negative real interest rates, will suffer real loss of wealth to those with hard assets you're waiting to buy cheap
Steve - you badly need to research your assumptions.
Robo47 - youre dead right

Inflation backed by expanding energy...what happened in the GFC? the world's govns printed like mad and the best they achieved was flat, no sign of nflation 4 yearson.
I dont assume....I have some logic behind my view of serious deflation.

Now  dear readers, this is the business savy we need more of in NZ! Well done BH, you've got the traffic through your site and made your advertisers happy on a particularly quiet weekend! Nice! The pen is truely mighter than the sword...

And if he was smart enough to open a short NZD position before typing this up, he may have a tidy profit waiting when markets open.

Bernard seems to get sillier by the week.  What Bernard and other advocates of money printing don't seem to understand is that printing money doesn't actually create any new resources. 
Increasing the money supply by, say, 20%, doesn't cause the number of tractors, or factories, or basketball shoes to suddenly grow by 20%.  Money printing can only ever redistribute existing wealth. 
Those who get first access to the newly-printed money (the state, it seems, in Bernard's hare-brained scheme) get something for nothing.  They get a claim on existing goods without having actually produced anything, while those who get the money last (mugs like you and me) scratch their heads and wonder why everything is so expensive.
Printing money also tends to benefit the wealthy, who hold hard assets that inflate in value, at the expense of the poor, who tend to live from pay cheque to pay cheque. 
Bernard also needs to read Henry Hazlitt's classic "Economics in one lesson" to cure himself of his fixation with government infrastructure projects. 

Exactly Kleefer. I don't know why its so hard to see.

Bernard appears to be about 7 steps ahead of you here. Its obviously deeply simplistic to say no additional resources are created because they are. There are a large number of people who are not productive resources of the NZ economy at present, they are unemployed. There are also idle resources in the NZ economy, empty store fronts and also pleanty of businesses running far from capacity. Why is this?
Well primarily its because there is insufficient investment created by the market to utilise these resources at present. So in fact creating this investment can increase the productivity of the real NZ economy. Given this creating additional spending power and using it in this environment can be completely non-inflationary.
I do think one criticism which could be directed at this policy is there is little evidence of a physical shortage of housing at present. It seems more like the existing housing is too expensive at present (which is usually taken as an indicator of an underlying 'shortage'). I don't think that the price argument for an underlying shortage stacks up so you should look for real evidence of a housing shortage before deciding there is a shortage.
I think there could be quite productive use of similar money decreasing class room teacher ratios, investing in public infrastructure and developing sensible renewable energy sources which feed into the NZ power grid, and probably increasing staffing in the public health system where there is a shortage of nurses and doctors (and has been for many years).
I believe these areas are more sensible in some ways because if you concentrate investment into areas where the market model under invests (e.g if people voted they would want more investment here than the market puts forward) then you don't end up crowding out the market investment when that picks up and its investment capacity rises. The crowding out idea doesn't apply at present because there is far from full employment or capacity being utilised.
I doubt anything called 'Economics in one (simple, trivial, easy) lesson' could teach Bernard anything.

The trouble with Nic's thinking...!
" in fact creating this investment can increase the productivity of the real NZ economy."
This same BS is spewing from the fools mismanaging the us...the trouble is for every $1 of created investment the return is less than the dollar and it's a falling return....plus you have the problem of politically stupid spending leading to in some cases the cost of 'new jobs' exceeding several million each....
Nic you have to cut through your Keynesian cobwebs..you have to earn what you want to invest and govt earns NOTHING.

"govt earns NOTHING", you are seriously trying to support this idea? Say for example a citizen undertakes some work and creates something, borrowing from a commercial bank to undertake the work. This creates wealth, we accept this. So say now that the money to incentivise this citizen goes through the treasury books, you are trying to contend that this somehow doesn't create wealth? Even though the result is precisely the same? Some arguments are only around to stop citizens from governing for themselves.

Then by your argument Nic, Treasury can create wealth by lending free money to peasants Treasury thinks will invest it in productive enterprise returning more then the damage done by the printing....brilliant economics.


hahaaaaaha....you were just taking the P-ss.....you rotter.

No, I genuinely thought I am so brilliant that I had changed your mind 180 degrees just by explaining this.

Oh well in that case I grade you NCEA economics level 1...D...room to improve.
Must  develop ability to identify consequences of poorly thought out interference in the markets.
Prone to jump to conclusions...

So the main purpose of NCEA economics is to teach students not to interfere with the markets. That sounds like the policy manifesto of the guys who sat around, and completely didn't see a global financial crisis coming (and don't have an explanation for why its happening either btw...). Maybe the NZ curriculum needs a thorough review?

It sure does...Iain Parker would like to insert some new bits...the GFC you use to build a defence to your QE dream, error prone policy is a head scratcher.
Take you back to basics...printing does not work when the products that result fails to generate the wealth needed to fund the damage done by the printing. The fact that it's free money just makes it worse.
Unfortunately the NCEA stuff is still all about turning out identical sausages.
It is a simple equation...you would not borrow to invest in a business if you knew the returns from the business were unlikely to cover the cost of the credit...why should this rule be any different for a country. The reason we have to put up with that sort of govt idiocy is because the pollies are out to buy votes to keep the snouts in the trough and they don't give a rats if the return is a loss...just ask that fool and liar the Electoral College in the usa voted to be president.

You realise that Iain's extra curriculur bits point to the need for additional government spending to cover the de-leveraging of private credit? Look up debt-deflation and why Irving Fisher favoured 100% reserve banking. You appear to be in favour of austerity as a 'solution'. Maybe I will believe are onto something when the Greek and Irish economies don't default and head towards recovery. They have had pleanty of this 'solution' by now. One might expect they would have started the recovery if the theory behind this actually worked in practise.

Nic, you've said quite a few things here so I'll go through some of your points:
Its obviously deeply simplistic to say no additional resources are created because they are.
No, as I said before, printing paper doesn't cause more goods, whether capital or consumer goods, to appear out of thin air.  It just redistributes wealth to those who get hold of the new money first.
There are a large number of people who are not productive resources of the NZ economy at present, they are unemployed.
And the abolition of youth rates has a lot to do with this.  Sure, the economy hasn't been great, but the adult unemployment rate is only about 5%, hardly catastrophic.  However, the youth unemployment rate is 25%, with Maori and Pacific youth hit even harder.  
There are also idle resources in the NZ economy, empty store fronts and also pleanty of businesses running far from capacity. Why is this?
There is nothing wrong with "idle resources" per se.  What determines how capital is employed is profitability; if an investment is losing money it is actually wasting resources (in an economic sense at least).  Often, running "below capacity" is more profitable because of lower costs.
Why is this?  Well primarily its because there is insufficient investment created by the market to utilise these resources at present.
"Insufficient" according to what measure? 
So in fact creating this investment can increase the productivity of the real NZ economy.
Quite the opposite, these economically wasteful projects will reduce productivity in a number of ways, mainly by stripping the wealth from profitable (productive) private sector businesses.
I do think one criticism which could be directed at this policy is there is little evidence of a physical shortage of housing at present.
Looks like the market isn't so silly after all.
I think there could be quite productive use of similar money decreasing class room teacher ratios, investing in public infrastructure and developing sensible renewable energy sources which feed into the NZ power grid, and probably increasing staffing in the public health system where there is a shortage of nurses and doctors (and has been for many years).
It's easy to be a visionary with other people's money.  If these ideas are so great, surely the people using these services would be prepared to pay for them, right?  Perhaps the problem is that all the examples you mentioned are in state-dominated industries where provision of services is dictated by bureaucrats and not consumers?

The entire financial industry produces nothing........what you seem to not understand is liquidy trap economics....

Mandalay - the cynic might well claim that BH's article is exactly that, traffic drive. However,  he's a financial media commentator and needs to retain some creditability to be worthy of people listening to, or reading, his opinions. I will give him more credit then you in that regard and take it that he's just plain wrong rather than manipulative. We're all allowed to get one wrong occassionally, or have an occassional only half thought through opinion ?

Iain, I am not a monetarist, far from it.  Monetarism got us into this mess after Keynesian policies delivered us stagflation in the 1970s. 
However, Austrian economists have correctly been correctly predicting our current situation for years, explaining how government-sponsored manipulation of the money supply and interest rates distorts the capital structure of the economy and causes unsustainable booms that always result in busts.
There are a lot of interest.co.nz readers who could benefit from reading some of their teachings (including Mr Hickey himself, it seems).

you have no proof he is wrong.....the two opinions are simply opposite.

GrantA - some of us have been supposing for a while, that beyond peak there had to be stagflation, increasing over time. Less being done, vs too much dosh.
In that scenario, presumably a proactive community has to still do things. Any renumeration will be worth less tomorrow, and less again the day after. So what?
I suspect bling-consumption wouldn't be a good area of investment      :)

What fun thread, like a hip-hop kind of thing - so much knee-jerking. Some of that here, but slightly less so I think - same article in The Herald:
Well done Bernard.

Les - yeah, makes you re-think your 'givens'.
Me, I've just done the Chris Martenson thing for so long - getting set up to not be vulnerable in a physical sense, but it's good to question whether what you're doing is valid.
How're you surviving?

Assumptions, assumptions - can't live without em', can't live with em ... at least I hope not!
Surviving well thanks, it's all relative ....
Cheers, Les.

Well done BH, but what hair brain idea will you pen next weekend, to feed us drolling old dogs on the sideline to munch on?

Similarly, data can be understated in order to hide bad news. The understatement of inflation results from basing the Consumer Price Index (CPI) on substitution rather than on a fixed basket of goods, the traditional method. During the “progressive” Clinton regime, a deceptive change was made to the CPI. If the price of a good rises, for example, sirloin steak, the higher price does not appear in the index. Instead, the CPI assumes that consumers switch from sirloin to a cheaper cut, such as round steak. Thus, the rise in prices is negated by substituting goods that represent a lower standard of living.
By understating inflation, the government has been able to produce a “recovery,” when in fact the positive economic growth number is created by counting inflation or nominal GDP growth as real GDP growth. John Williams says that when inflation is measured in the old way, prior to Clinton, the US has experienced essentially no real GDP growth in the 21st century. In other words, we have had a decade of essentially no growth in the GDP while the presstitutes in the media proclaim “recovery.”
The temptations of Money printing..!!!!   

Bernard, you make the point that in the 1930s, after New Zealand followed Britain off the gold standard, the then newly formed Reserve Bank of New Zealand, printed money to get housing programs started and the economy moving. It seemed to work.

Therefore, if this worked then, it will work now.

I don't think so.

The era was different, after all we had just left the gold standard and the values of assets were where they should be. Today we have been off the Bretton Woods quasi gold standard since 1971 and in a totally fiat money world. Many more years of lost value has ensued since then. Asset prices have increased considerably. Meaning, we have already had massive inflation, tearing the heart out of savings and value. Do we want to accelerate that but debasing our currency more?

I point you to another graph or here . This is what happens when currencies are debased and assets maintain value. Prices rocket higher. In 2004, you could buy 1/600th of an ounce of gold for NZ$1.00. Today, you can buy 1/2150th of an ounce for NZ$1.00. Hmm, shame we can't print gold and other assets.

I am surpirsed by your commentary, perhaps tongue in cheek, putting out such ideas. Currency debasement is the last resort of governments trying to protect their power, not governments trying to protect the savers and the middle-class they are supposed to be responsible for.

Just look at oil prices and where they are headed. Because the USD reserve currency is being debased by QE and bond buybacks etc, oil prices have to go up. Remember the inflation equation: Price = Asset + Money Supply. The more money printed (inflation), the more prices rise.

But there is a catch, especially in the US at present.

There are trillions stored at the Federal Reserve in the USA, but this has yet to be 'let loose' on the economy. It has no velocity. Business is not confident to spend, so doesn't require it. You need to spend it or lend it to get the inflation moving, and hence prices increasing. If confidence does come back, watch out for velocity to increase considerably and inflation to take off.

Of course this also assumes that the curent inflation rates reported in most major economies is correct. If we measured inflation now the same way we did in the 1970s, and we can, the rate is likely to be a lot higher, perhaps around 8%. Tell me that doesn't ring a bell when you go to the supermarket and seem to get less for your pay packet.

However, to remain competitive, short term, we will probably be forced to debase our curency somehow. I don't agree with the idea, but we are all inflaters now.  That's just the way it has always worked throughout history when fiat currencies take over.

A race to the bottom and a shift in the ownership of wealth.

After reading just the headline, I am really glad to be about to spend all my savings!

Wise move Elley....debasement is on the move....splurge on essentials and stash em away for later...sacks of feed for the chooks....a million dunny rolls...bags of beans....corn....grain for the home made bread....a Predator for the other half to go fishing ....fruit trees for the yard.....preserve jars by the gross.

Yep. It seems silly to me to actually want to get rid of savings but in our case, we had a costly project planned so under the circumstances (super low interest rates on deposit, 40% inflation on insurance premiums and 15% on rates, to name just a couple), it makes sense to bring it forward rather than put it off.
With the super wet summer we've had, our 40+ fruit trees seem really happy, and so are the dozens of blueberry bushes so I'm looking forward to lots of fruit in a few years' time. Chooks have been lazy lately, and hubby must improve in the fishing department but here's hoping!
Still, our idea was to save significant amounts for our kids (thinking about their studies already even though the oldest is just 7, first house etc) and for our retirement but it doesn't seem to make much sense to do that right now. We're "only" 36/37 so I figure we'll wait and see how things turn out before we do that...

Wolly - careful, there may be suits and 'pollies reading this - no need to add to the cardiac arrest lists.
You can preserve with any glass jar and it's lid, if they go hollow with a 'tink' when they cool, it's worked. The lids, not the jar.....

PDK, have you found a copy of my  despairing man yet ?

And the beer PDK...and the wine...and the Brandy....all worth making and stashing away for winter play. I'm told chooks love a little beer with the mash...you don't need to clip their wings.

FYI via email from a reader:


Dear Mr. Hickey,

My understanding as a layman is that inflation won't manifest itself necessarily by the expansion of the monetary base. The banks need to lend the new money out so that the multiplier effect can occur. Therefore expanding M1 - the basic money supply "out there".

So far, ion the US at least, the banks deposit the new money back with the federal reserve because they are too scared to lend it out.

If they do start to lend one day, and too much money has been created we risk hyperinflation.




Interesting argument. It hasn't happened yet in Japan. Britain has been printing for four years and America has been printing for four years. Inflation is falling or low in both.
You could argue the money printed was 'exported' in the form of rising prices, particularly for food and oil, elsewhere.
But we also see the rise of globalisation shifting high wage costs to emerging markets, which is driving down the cost of manufactured goods. The next area to be affected will be services such as IT and medical services.

 it didn't happen in Japan coz they lent the money *outside* Japan - into places like New Zealand.
Heard of the Carry Trade?  You need to widen your view of who is creating money and where it is ending up.
The printing offshore can cause inflation here.

So globalisation is deflationary.  Technology is deflationary, Pak'n'Save "NZ's lowest food prices" is deflationary.  Don't the people realise how bad this is for the economy?  No wonder we have to print so much to get inflation, all these factors are driving prices down.

FYI from Albert in reply

In support of my arguement would be the examining the graph of monetary base vs velocity. They are inverse. ie. cancelling one another out resulting in no more money in the system - just more "potential" money. In the case of the US Fed:





Like I say. I am a layman. I just dont see how we can print our way to wealth.



Really BH? Inflation falling or low in the US? John Williams doesn't seem to agree...
if you adjust back to the 1980 method of inflation (which you have to to compare apples with apples) - it looks like inflation in the US is running easily above its average for the last 30 years? I wonder how you read these charts then?

FYI from a reader via email
A responsible government printing its own money upto the levels they would
have borrowed other wise is actually massively deflationary.

Firstly because no interest has to be funded and secondly because no capital
repyments have to be made.

Many thanks. Not sure about massively deflationary. Not the case in Japan, and there is a risk of inflation if resources are fully employed.

Gotcha ...." there is a risk of inflation if resources are fully employed"......Now off you go Bernard and apply the grey cells to figuring out whether or not nz resources are fully employed...
Don't hoodwink yourself into thinking all the unemployed are a resource waiting to be used...and good luck finding new fishing resources...and new land....and abundant water..and cheap fuel....
I suspect you will discover a far greater potential for inflation than you first thought.

FYI from a reader via email:
Hi Bernard, I'm an engineering student with an interest in economics. I read your latest column where you made mention of Modern Monetary Theory. I think you may be interested in the views of an Australian economist called Steve Keen who predicted the global financial crisis and criticizes neoclassical economics from a viewpoint similar though not identical to MMT. 

In this video he appears on HardTalk BBC to make the case for a modern debt jubilee (essentially printing money to give to the public, like your idea): http://www.youtube.com/watch?v=rGkmgnprrIU


And here he does a demolishing of the economics taught in schools: http://www.youtube.com/watch?v=1L6-loOZYLc&feature=plcp&context=C331d6c7UDOEgsToPDskLxBry_ED7bCbJMLvj_MJkJ



FYI from a reader via email:
Dear Bernard


I read with interest and facination your article.


Could it be at all possible.?


I went through inflation rising so fast in the 1970's because the Nats dumped Labour's Capital Gains Tax.  It was both good and bad as now we as homeowners from that generation are reaping the rewards.  But the down side is that today's kids virtually can't afford a first home.


We moved from our first home with a good deposit on our second because of the 1970's inflation but then in 1984 inflation took off again.  Our interest rate went from 12% to 24% in a year.  That was terrible and alot of people lost their homes.


This increase in interest rates is terribly threatening to families with mortgages.  Especially with the amount most now have to borrow.  Could you imagine now a $300,000 mortgage at $24% interest - that is nearly $75,000 per year in interest.  Who could survive.


Yet the idea is really just the number to (a) stop the sale of assets, get Christchurch built and build more homes in Auckland.  But they must be built of solid materials like brick & tile and not the polystyrene they now build with.  Someone needs to do an analysis on brick state houses with a tile roof versus wooden ones for maintenance.


The only other way is to do what they do in Switzerland and that is to create major industry in smaller provincial cities so the folk there can work in them and then people move there.


I am extraordinarily disappointed at the amount the government has borrowed in the last three years.  


I think the entire governmental system needs to be restructured.  Too many MPs - too many perks - and the one that is the most audacious and yet never discussed is the money paid to those who leave parliament.....How many people are receiving money after leaving and how much 90% free travel and other perks are being paid out by the taxpayer

each year - each week .???   This absolutely must stop.  If you cease writing for the paper will they continue to pay you a golden handshake for the rest of your life??? I can bet - no way. So why should this be okay for parliamentarians.   


They make the rules - we the taxpayer are fools who do nothing because we don't know what to do to stop it.  All parties are the same - greedy self serving  who hate beneficiaries.


How many folk have lost their jobs in the last 3 years.  Alot of them will be beneficiaries now.  How many more over the next three years.   What are we to become.


I would like to think your idea would work and I believe it would have worked - had all our banks been owned by ourselves.  I wonder what the Aussie banks would do if we started to print money.....


Our economy would break down very quickly - very very quickly I suspect because rents, and mortgages are paid by alot of New Zealanders and they will not be able to pay if the banks put the mortgage rates up to correspond with the printing of money.


What do we do....??  Dammed if we do and dammed if we don't I say.


Write some more on this if you can.


Yours faithfully



I'm not so sure interest rates will increase.
Japan, Britain and Europe have been printing for the last four years and their interest rates are at record lows.
It all depends on how much spare capacity there is in the economy and the ability it has to import deflation from overseas.

If a young member of your family came to you, seeking your wisdom, now, today, about buying their first home, for $400,000 using a bank mortgage, with an LVR of 90% at current interest rates, what would you advise:-
(a) everthing will remain in stasis for the next 10 years, interest rates will remain stable, or
(b) deflation will occur, interest rates will reduce, and capital value will fall, or
(c) inflation will occur, interest rates will rise and capital value will rise.

FYI from a reader via email:
Bernard the only way of getting the world in order is to let the free market reign.
Let the poorly managed, the bad business models and the unproductive business find their own fate.
Propping them up artificially is proving ineffective all over the world and intervention will only put the inevitable off for longer.
Better to suffer for 2 years than twenty.
NZ makes me proud with its lak of intervention - especially in the property market.
Cheers Bernard

Nice idea about letting the free market reign.
The trouble is no one else is.
The other problem is that there is no such thing as a 'free' market, just interests that tend to make themselves more powerful as they get bigger.

 My understanding of a free market is one that is free of monopolies, and fiat money and a market that is free of monopolies do not seem to go hand in hand in my opinion. So, welcome to corporatism?

Oh, there is a free market all right. I have a small vineyard and talking to other growers about costs, we agree that they are getting close to 1k a tonne and up from $400 a tonne a few years back. The winery is offering $1200 a tonne, believe me freedom is being expressed, the chainsaws are going to be busy. The best way to reduce costs is to slash production, its happening everywhere. Key want to get the thousands of youth that are not working ( see stuff)
There were a group of 16 and 17-year-olds who were not at school, in work or in training.
"They are on a collision course. That group, and there is thousands of them, when they turn 18, the day they are eligible for a benefit, they will go and apply for one.
"So we need to invest in them very heavily and take them off that pathway to the Work and Income office."
Key denied the Government had a punitive approach to welfare reform, saying its proposals were balanced.
no way Im going to be employing any of them, give me a keen young Indian anytime, they turn up on time and don't come back at night to pick anyting up thats not tied down.  They just want to work and get paid a fair price.
Then the Lord said to Cain, "Where is your brother Abel?""I know not," he replied. "Am I my brother's keeper?"

When - and to what extent - is X responsible for Y?


Unless he wanted to attract traffic with tabloid journalism style financial constructs, Bernard would have been better served by adopting the UK Fabian Society's proposal
First, Labour should champion a state investment bank: sell tens  of billions of pounds of long-term bonds at today’s astonishingly low interest rates and use the proceeds to capitalise an arms-length investment bank which can then lend for spending on infrastructure, business growth and house-building.
This idea fits better with modern central banking monetising procedures. Permanent purchases or temporary RP collateralised lending via third-party securitised or otherwise bond issuance provides the central bank an elegant exit strategy.  
Bernard's proposal never quite got around to explicity stating how the RBNZ would deal with it's liability once it lent the thin air money directly to government spending initiatives.
I find a lot of investment advice fails because a robust, if not elegant, exit strategy was not  devised.
The LGFA is an example of the type of institution better suited to handle this sort of infrastructure undertaking. The debt is repo-eligible with a fixed redemption date and hence acceptable for RBNZ purchase in times of need or instant monetisation.  

FYI from a reader via email:
Bernard over the last couple of years I feel your reporting on the NZ ecnomic situation are accurate and well evaluated and they are about the only important contribution to the Sunday Herald. However you now seem to be following a different line which I find confusing and gives me an uneasy feeling. I do not believe QE will  ever work.
The end result will be  hyperinflation with the currency returning to it's intrinsic value. ie. zero and Gold at $5000.00 plus.    No politician  wants to face up to the axing of the welfare state which is now broke in most developed Western economies which is the way to go with the entitlements now unaffordable.
The article in the same edition of the Herald by Damien Grant mirrors this in  Brian Gould's attitude that inflation is the solution.
As you know Gould is a socialist. Sorry socialism only works till other peoples money runs out. Give me Chinese communism any day. 
Personally the meddling by politicians in the normal  Economic  cycle in propping up enterprises that were deemed too big to fail has destroyed the  prospect of a clean recovery. They should have been let go  then and there.Their    asset value today is but a fraction of their book value. 
As I believe we are now entering a period of heightened risk in this economy wth a stretched government sector. The proposed Christchurch rebuild is unaffordable and should be reasessed.     We don't needCapital Taxes instead we need to get it flowing.
Selling down State owned assets is purely cosmetic to keep the rating agencies onside otherwise we'll be dealt to like Greece and Ireland and learn how to spell the word Austerity.   
  By the way if you don't mind me asking are you a socialist?. I was curious.  
Thanks, John

Thanks for your comments.
Am I a socialist? No. I'm an entrepreneur helping to employ 10 people and make a profit while providing a (hopefully) useful service to the public and advertisers/sponsors.
On your point about money printing automatically leading to hyperinflation, I'm afraid you're just plain wrong. It hasn't happened over the last four years in Britain, America and Japan, although it could be argued that the money hasn't filtered through to the real economy because it is stuck in cash accounts in banks and in financial markets. 

Bernard is actually adding to the problem - not doing anything real, but expecting 10 people to be able to buy real things as a result.
In a way, he exemplifies the disconnect between finance, and the planet. Between the temporarily artificial, and the real. I'd be worried in his shoes - he's a discretionary spend.

Bernie is totally doing something productive, he has identified an opportunity in the market and has exploited it.  

He has clients that obviously see value in spending their money with him (advertisers) in order to see a return.  In the same way a newspaper or radio station does business.

Unlike his banking clients who support him perhaps, who are parasitic by nature, who survive by sucking the lifeforce from the host (you and me).

Bernard - the world wont get inflation whilst monetary velocity remains collapsed as it is currently (collapsed but still no deflation?). When it does pick up then the inflation problem develops. And the timing for that can be well longer than 4 years, and sometimes less based upon history.
You cite Japan where massive money printing hasn't produced inflation - why ? -  self funded internally by private households so no exchange rate risk (read, no devaluation and imported inflation that others have experienced over time in the western world when they fund debt through money printing).
But another question,  is Japan the example your using as to why we need to go down their route ?  God help us, decades of no growth and growing indebtedness.

GrantA - the no-growth is a given - you can't have anything else now. It isn't being properly accounted/monitored anyway - GDP is a nonsense.
Growing indebtedness? Absolutely, I warned the Dunedin City Council not to go there re their Stadium. However, in a resource-scarce world, the existing equity (a decreasing percentage of which will be borrowed, due to increasingly wary lenders) will bid up the necessities of life, and given that life is at stake, the bidding will be fierce. There's your inflation, so stagflation may well be the order of the day.
Meaning that owning your resources - hydro power comes to mind - is the best way to go. In that scenario, there's no way a fewering few will hold off a manying many, so expect more protests, leading to more nationalisations, and more sovreign defaults. The bard left a bit of the sentence out: "On the downside of the Gaussian curve, neither a borrower nor a lender be".
Gonna be an interesting decade.

Berno, congrats on acknowlwdging the issue of debt free currency, it is really great to see you discussing it.  
There has been a lot of pent-up interest in the topic which is evident in the number of comments on this post, may we see more of the same!
Great effort +++!!!

Its a really interesting proposition and lots of well thought out but diametrically opposed contributions to the thread.  None so far today so I am probably a bit late back to the party.
I think it comes down to what money is. It is really just confidence.
There has not been a society in the last 5000 years that I know of that has got by without some sort of means of exchange of good and services or without a way of storing value for later use. Barter only works to a very limited extent and your carrot crop is only a store of value while you can keep them edible. Things you can dry are better but only while you can find a dentist who needs your pepper corns when you want your tooth fixed. I understand David Lange used to get paid in cabbages when he was a solicitor in Kaikohe but it worked out so badly for him he became Prime Minister instead.
Given that you need something it can be virtually anything as long as the users believe in it. Some people even believe in Gold despite it being very inconvenient in large amounts.
Can we print money to build houses( which I take Bernard to  mean having the Goivernment writing out cheques to builders without borrowing the money to do it either locally or off shore) ? It sounds like a free lunch and they are not supposed to exist.
You cant do it secretly because people like Bernard and his team will suss that out as will the ratings agencies. You have to be up front and announce the programme which is what the ECB, the Fed and the BOE do. The result so far has been that markets shoot up.
What would happen here? Given that part of our problem at moment is a bit too much confidence in our Money from off shore a little knock might not be a bad thing but how do you manage the consequences? Once the inflation genie is out it can be hard to get back and you can become Zimbabwe quite quickly.
It might all balance out. Home building as an activity multiplies up very well as it is labour intensive , generates wages and profits and also stimulates demand for other goods like appliances and furnishings. You might find the extra GST , PAYE and company tax  plus some ongoing rent presuming the state builds rental units would go some way towards balancing the cash in / cash out over time. That should not be a confidence destroyer.
More housing stock of whatever kind so long as well located would take pressure off rents and house prices so ought to be deflationary . That would not dent confidence in our money either.
Perhaps the answer is that we can get away with a little bit of unfunded public expenditure without debasing the currency. How would we know where to stop?
The danger is that the concept makes it easier for politicians to buy votes with no short term sanctions and we would find ourselves on top of a very slippery slope. Once past the tipping point it would be hard to claw back and we dont know where the tipping point is.
Maybe this is a shot we should keep in the locker until we really need it.

"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
-Napoleon Bonaparte

Welcome to corporatism? Instead of everything being owned by the state (communism) it can all be owned by private corporations instead (corporatism). Also can I pitch the above as a contender for the "quote of the year"?
This being in conjunction with Bernard Hickeys quote "Let's print, baby, print, and then build, baby, build".
Then we can pay, baby, pay...

Bernard, another great piece. Unfortunately no mention of supply and demand.
Just as Steven is an idol of peek oil, i am an idol of supply and demand.
You see, it does not mater how you raise and lower the money supply, either by QE or bank creation it is still stuffing about with the demand side.
A while back i read a very good article in which it was proposed that we have, and keep, a stable money supply.
So let's stop stuffing about with the demand side and stirring at our navels wondering what's gone wrong.

If you are a fan of supply and demand, I assume you know why supply and demand curves don't apply to markets.

Nic, it depends on whether you are analysing mini or macro economics.
On a macro level increasing the money supply distorts the balance between supply and demand and can lead to inflation and even hyper inflation. However as i has said in earlier posts things have changed.
Firstly debt levels are very high putting a damper on further borrowing and hence a slowing of money supply. But more importantly, we now live in a global market and so the supply side is now global while our demand side remains local.
Every country is desperate for growth. Just imagine if all the countries started to produce at maximum (peek oil aside). How much money would there need to be in the system to avoid an oversupply and deflation?
Put aside cartels who control some supply.

Wow, you saw some research which shows that you can't extend micro to macro economics, and then tried to argue that you can...
On a macro level increasing the money supply changes the balance between supply and demand, but you don't know which direction thats going to go because you can't extend micro to macro. The supply and demand maven also appears to be unaware that not all micro supply and demand curves are downward sloping.
Good luck with proving your favourite macro theory by the way. This result basically acts as a proof by contradiction which shows that you can't extend micro to say anything about useful macro economics.

Thank U Nic for your considered reply.
As u know it is necessary to be as brief as possible in a post and so all options cannot be covered.
Recently Bernard included an article in which it stated that "all the money printing will not cause inflation because capacity is low" We must remember that capacity is now global, not local.
We had ten years in which the FED and reserve banks held interest rates at low levels and as a result ended up with a mountain of debt but not rampant inflation.
Global capacity will increase as peoples ability to borrow and spend increases and no matter how much they borrow and get into debt they will never be able to buy up 100% global capacity. While you have a supply surplus you will not have supply price increases.
How can stuffing about with the money supply fix anything in the long run.

Oops clicked twice

FYI from a reader via email:

I'm all with you - Print Baby Print  so we can .. Build Baby Build.


You forgot to add that this approach has a lower external funding requirement

as much of a house's contents are locally produced.


When the RBNZ is the croupier, makes the chips and set the rules - how can you lose in the FX Casino.

Switzerland intervened to protect it's exporters -  the sun still rose and today you won't find a single comment on this issue.


My checks show the following countries / areas with effectively managed currencies.


China Linked to US $ 

HongKong US $ linked

Singapore Managed currency 

Switzerland Managed float - Euro linked

Brazil Managed float with interventions

Taiwan Managed float

Korea Managed float

UK Managed via QE

US Managed via QE

Euro Managed via QE in various guises


So we are competing with basically the rest of the world as they all race to the bottom to protect

their exporters while we stand pure and poor.


How on earth do we - with the GDP less than Melbourne city think we can operate in this environment ?


At least as we sink beneath the waves we can cry - I'm still a virgin.

On current policy settings - Sink we will - the only issue is timing.

Interest rate rises will be the trigger.

Cheers John

Great idea, lets #win the race to the bottom.  Ignore the fact that our trade surplus is rising, thanks largly to the fact that we havn't debased our dollar to the same extent as others.

Bernard what have you learnt in the last ten years. You are becoming a basket case