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Bernard Hickey explains why falling inflation expectations falling towards 0% and below is problem for everyone and why the Reserve Bank should care and act

Bernard Hickey explains why falling inflation expectations falling towards 0% and below is problem for everyone and why the Reserve Bank should care and act

By Bernard Hickey

What could possibly be wrong with falling prices?

That's a question we're all having to ask ourselves now as global deflationary forces gather strength and force central banks and Governments into all sorts of awkward places. 

Central banks in the Euro zone, Sweden, Japan, Denmark and Switzerland now have negative interest rates on the money deposited with them by banks. Banks are having to pay to park their money. Some of those banks are beginning to charge their biggest clients for the privilege of keeping their money in the bank.

It is creating all sorts of weird incentives. It's actually beginning to make sense to take your money out of the bank in these countries and stash in bricks of cash under the bed or in a safe. People with billions are now doing their sums on how expensive it is to store their savings in cash in their own vaults. At some point, the negative interest rates will fall low enough that it makes sense to build vaults, employ body-guards and buy a whole lot of suitcases with big locks. It's one of the reasons why the European Central Bank has just announced it is looking at withdrawing the 500 euro note from circulation. It wants to make it harder for people to avoid these negative interest rates.

Negative interest rates also upturn all the old expectations about cashflow and early payment of bills and taxes. In the days when there was a bit or even a lot of inflation, it made sense for Governments and businesses to encourage early payment because the sooner the payment was made, the sooner the cash could be spent to avoid being eroded by inflation and the sooner the cash could start earning interest. 

In a world of deflation and negative interest rates it actually makes sense to encourage people to delay paying their bills because money in the hand later is more valuable than sooner when you can more stuff with it later. Last month the Swiss local Government of Zug scrapped its discounts for early payments of taxes and told ratepayers to delay paying so the Government could avoid putting the money in the bank and having to pay interest on the deposit.

Very quickly, cash starts to flow more slowly around the economy and hoarding begins when expectations change about the future value of money -- either as a store of value or a way to buy things. When deflation sets in, it makes sense to hold on to your money rather than spend it. The thinking of consumers and businesses changes in a way that most of us haven't considered. 

For example, banks struggle to make profits in world of negative interest rates. They have to pay the central bank money to look after their reserves because they have no choice -- there's only one central bank. But they find it very difficult to then charge their own customers to look after their deposits. Some Swiss banks have tried, but have only succeeded with a few clients with very, very large deposits who are unwilling, for whatever reason, to take their money out of Switzerland. This is why when the Bank of Japan cut its bank deposit rates into negative territory last week financial markets reacted surprisingly badly to what was actually easing of monetary policy. They became worried that bank profit margins would be cut even more, making the banks riskier and shakier in the long run.

Businesses also become more nervous about investing when they see prices falling. That's because they also squeeze their own profit margins. As their competitors cut prices, they have to find ways to cut their costs even faster. Cutting wages is surprisingly hard, although it has begun happening in places with entrenched deflation such as Japan. 

Everyone agrees that deflationary expectations are a bad thing, which is why our Reserve Bank watches inflationary expectations very closely for any signs they are losing their moorings and starting to fall towards zero, or lower. This week the Reserve Bank's own survey found one year ahead expectations fell this year to a record low of 1.09% from 1.51% and two year ahead expectations fell to a 22 year low of 1.63% from 1.85%. 

This is why the drums are beating again for the Reserve Bank to cut interest rates again as early as March 10. The Reserve Bank cannot afford to let expectations about inflation fall and it's not surprising they have fallen. The prices of goods in the shops have been falling for three years and the most prominent price in people's minds -- the price of petrol -- is falling too.

Just as for any shop, falling prices make sense for a short while to clear stock and bring people through the door for the first time, but continually falling prices are a dangerous thing for everyone.

A version of this article first appeared in the Herald on Sunday. It is here with permission.

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The RB mistakenly believes the deflation phenomenon is just a temporary glitch and soon we will return to a pre-2008 condition, then the RB can re-continue "fighting inflation"!
Of course the outlier is property prices. And the price of non-mortgage lending in NZ is still 12 to 26% so some are still prepared to pay a relatively very high price for money.
Will new laws soon make physical cash illegal/obsolete?

This what happens to fiat; it begins as a medium of exchange, thats fine, it becomes a store of "value", thats wishful thinking, it gets hijacked, thats history, and like any church where belief ignores reality, it ends in tears.

Hooey. This is simply not a big deal for us. Betcha even in time of deflation when the first home buyer looks around for that big loan the bank will not offer to pay her a monthly fee for taking it.


Exactly. It's ideological central bank nonsense squarely focused on transferring wealth from trapped savers, including banks, in a forlorn bid to revive the animal spirits of business formation. Unfortunately, that role is reserved for select banks currently refusing to lend industrial size chunks of credit without due reward and interference from ill equipped central bankers. Until the former determine the exact cost of money tension between creditors and debtors little will change, beyond a downward spiral of failed money management debacles. Previously tenured academics fabricating zero cost money certainly rates a mention among the most glaring missteps.

But it is the overwhelming interference by politicians and the bureaucracy to constantly regulate every area of the activities of human life that is allowing the transfer to occur......hence my constant whining for most business types the regulatory environment is now taking up more time than the actual real business side and this is the underlying mechanism which supports the transfer as a bigger and bigger chunk of activity is unproductive or produces no real meaningful multiplying factor but rather a significantly reduced factor that enters negative territory.

It is a false premise that Government and bureaucracy can create value add on in any economy yet that is what they want everyone to believe.....the current way of measuring their economic benefit from policy and regulation is a very flawed model.

Spot on Stephen. DC's favourite with some choice comments:
This whole consumer inflation targeting gambit, of course, is an inherently preposterous notion because there is not a scrap of evidence that 2% consumer inflation is better for rising living standards and societal wealth gains than is 0.2%. And there is much history and economic logic that points in exactly the opposite direction.

Between 1870 and 1913 in the United States, for example, real national income grew at 3.5% per year——the highest gain for any 43 year period in history. Yet the average inflation rate during that long period of capitalist prosperity was less than 0.0%. That was real “lowflation”, and it was a blessing for the average worker, not a scourge.
Bond yields on German debt up to 10 years are now negative because speculators are front running the ECB and other central banks.

That is, they are playing for price appreciation. For crying out loud, it is not a case of the world’s bond managers, benighted as many of them are, saying I’ll have some more of that tasty negative yield!

In short, the central bankers of the world are driving the lemmings on one last run toward the sea. Yet this fantastically dangerous experiment is doing nothing for the real economies of a world staggering under unpayable debt and massive excesses of production capacity, infrastructure assets and working inventories. Instead, it is just feeding the mother of all bond bubbles.

So lower interest rates signal or encourage deflation, Bernie, yet your implied solution is for the RBNZ to cut interest rates further?!
I don't think I really need to explain the fallacy of that suggestion.

Lower interest rates are a result of dis-inflation.

Low rates encourage higher priced assets. All we have seen in the last few years is a debt fueled market. The Chinese debt expansion has fueled the world economy since 2008. Has there been any real growth in this time growth that hasn't been bought by a future liability? The reason they call a bubble a bubble is because it's full of air. We are living in a world of pumped up prices so it's no surprise that prices are falling. Central banks and governments will do anything to keep the lie going. It's not real ,thats why it's beginning to fail.

No I dont agree, excess demand over supply encourages higher priced assets. if you were correct the booming house prices would not be in select parts of NZ but all over NZ or much of it.

I woke up in a cold sweat from a nightmare last night. It involved the following:
More negative GDT auctions
No further OCR reductions by the RBNZ.
More dairy farm NPLs (non-performing loans) for the banks.
The implementation of the RBNZ's Open Bank Resolution process.
My modest bank - savings.

Sharpen the pitchfork

Zugzwang; A player is said to be "in zugzwang" when any possible move will worsen their position.

So, again, what is the problem with falling prices? For the most part they are due to increases in production (encouraged by cheap money) and a massive increase in participation in the global economy by the huge labour forces in China, India etc. This is similar to what happened in the 19th and early 20th century and was coincident with falling prices and the biggest increase in wealth and prosperity in human history.
We have robust credit growth, modest unemployment and reasonable growth. There is no rational reason for lower global interest rates which are already the lowest in human history. This nonsense theory about inflation (always and everywhere -M.F.) being all about money supply needs to be put to rest.

And if successive governments had not been so foolish in allowing runaway house price inflation we would not be facing the consequential prospect significant and prolonged house price reductions and the deflationary effect that that will have. I.E. exactly as per Japan.

but that is what the voter was happy with.

The RB is treading a thin line between staying the course and the risk Main St inflation expectations will turn negative. That's when the trouble starts. But their outlook is that the US will come to the rescue with inflation that will supersede all other deflation and the currently-redundant Philips Curve will suddenly kick back into life.

No need for concern, it will sort itself out in its own Neo-classical way.


Most journalists and career civil servants don't want to acknowledge the 2YK fiasco ever occurred. But it gave them near a decade of something to do. And the rest of us had to dance their tune. Delicious for them.
Deflation angst ? Looks like a 2YK dance to me.
A study of the 2YK fiasco is a study of the journalistic/civil servant power play. It will never be done.

Ditto "fighting climate change" now that one is a beauty impossible to measure performance, beset with natural variability. A politicians dream. Trillions squandered to achieve nothing but "raised awareness" of a flaky hypothesis and some dodgy windmill, wood pellet, corn ethanol etc. schemes.

And bird flu, remember that? That was y2k with feathers on.

Isn't the answer for the RBNZ to reduce interest rates and tighten credit at the same time?

Reducing interest rates should tend to lower the purchasing power of the NZD, thus creating their beloved inflation, with a lag, of course.

Tightening credit should tend to restrain the madhouse that is house prices. The RBNZ has many proven ways to tighten credit, eg move the funding ratio from 75% of one year to, say, 100% of 2 years. (just kidding, 100% of 1 year would be a start). Or increase the reserve requirement to 10% equity of the total loan book, no exceptions or adjustments (again, just kidding, the bankers would have heart attacks). Currently capital and reserves stand at $35 billion and loans at $404 billion, or 8.6%, according to my reading of Put another way, the banks lend $11.5 for each $1 of equity, no wonder they are so profitable (at who's expense?).

Why do bureaucrats dislike action? Why do they so love to delay and obfuscate? Every simple decision becomes a major drama.

No action is taken because in this country credit expansion equals economic growth. Remove credit and you remove our gourmet consumption habits.

The thing is with the RB it only has an effect on ppl getting a mortgage as a FHB especially. For cash buyers and speculators looking to make 20% short term the RB has no effect on them, yet its these gamblers that are the problem.

Somehow they need to tighten things in a way that will not be deflationary, but the brakes on house price inflation and create a huge cash buffer (out of the pockets of the property investors and not the long suffering savers and productive economy) to mop up the inevitable mortgage defaults. Figure that one out and you are doing well.

the productive part of the economy has ended up with very a high cost structure and falling returns. Dairy farmers are not the only ones in the gun, sheep farmers are struggling too.
There will be as much as 12 billion less paid to dairy farmers than there was two years ago.
by iconoclast | Sat, 20/02/2016 - 08:05

using a standard multiplier of 7 it will take $84 billion out of the NZ economy each year

NZ nominal GDP = $230 billion = a big hole


The government is now spending a billion dollars extra a year extra in pensions, this will continue as the baby boomers begin to retire.

There will have to be cuts.

These super figures are always gross.

Post tax and for many this will be at the top marginal rate,
the net cost of National Super is a lot lower than the published figures.

We need to recognise this and measure National Super on a post tax basis as the accurate basis of cost to the crown for what is probably one of the best / simplest / lowest cost systems in the advanced world.

It is quite aggressively means tested - but through the tax system.

A single person with no other income vs a married individual with other income who can see ~ 40 % less post tax.

it was in the NBR.

That extra $3.5 billion is currently allocated as $1 billion in Budget 2016 and $2.5 billion in Budget 2017.

This is extra spending on top of existing spending and that in turn is also on top of the extra spending the government automatically allocates for population changes.

The big population change of course is the increasing numbers moving past the age of 65 and becoming eligible for the state pension.

In the past year or two that number has started to increase rapidly as those ageing baby boomers start to hit 65. It is adding close to $1 billion to government spending each year.

The government’s policy on this is not going to change, Mr English reiterated this week.

Current super spend is coming from the yearly tax take. Superfund has not been tapped into, yet.
Also a reason why inward migration of young people is allowed to continue: government needs to increase its tax take.
This is the easiest way, without actually increasing taxes themselves.
Although voices against immigration are starting to sound louder and louder. As soon as the government caves on this, they will have to increase either GST, or income tax.

Chris-M in deflation your money is increasing in value even under the mattress.

Why do you need a bank to pay you interest aswell?

it becomes about risk

I think that we are sort of agreeing if we read our subsequent posts. However the question of deflation is a little more complicated and depends on what is causing it.

Roger, how dare you stray into the uncharted territory of common sense !

'Everyone agrees that deflationary expectations are a bad thing.' What utter drivel Mr Hickey. Bernard you appear to write upon any article that is flavour of the week. Explain how an Aucklander , renting, stagnant wages, struggling to make ends meet would see deflation in some basic items as concerning. So many countries have simply seen their residents spend so much in housing , from China to Sweden to Canada to the UK to Australia and Auckland that speculation will turn to wave after wave of 'bad' deflation whilst the Central Banks will ( and presently appear to be) break ranks and bugger their neighbours to engage in currency wars and to maintain domestic asset exuberance for a little longer. Auckland holds 64 percent of New Zealands current mortgage debt, at some point our Central Bank will be flogging a dead horse. By the way the Inflation expectations survey does not reflect the views of the RBNZ

Try deflation on your wages & see how enthusiastic you are about deflation.
A modest rate of inflation is much more beneficial then sinking prices/demand for most people and businesses.

deflation on wages has been around in NZ since the contracts act was enabled, it makes it easier for big business to replace workers that leave for whatever reason with cheaper workers thus keeping the payroll from blowing out especially in a downturn when good quality workers are abundant
could not happen before that as you would come in on your award rate.
saw it big time in 2009 rates dropped by 10k overnight in my industry, went from before 2008 moving for +10 k pay rise to entice you to-10K take or we get some else

BH has explained it overall. But in addition a) its not on some items but the entire economy, so b) with deflation comes recession and a Greater Depression and with that comes job losses. So your renter now finds with no job he cant pay the rent, buy food etc.

Steven - So inflation and consumption debt with all of its environmental damage is good. And we should have perpetual unsustainable growth
Is that what you are telling us?

Prolonged deflation can eventually lead to major unemployment. Might seem good at first but think about the associated decline in demand that accompanies entrenched deflation.


I question whether all deflation is bad. We live very happily with some forms of it and actually it is very good. Cars, computers, electronic services and a whole host of consumer goods have been getting less expensive for many years. This means that for our 40-50 hrs work per week we are able to enjoy more stuff. Ie we all enjoy the fruits of increasing productivity. It is almost as if some forms of consumption like housing have been put in a totally different category and the economy is geared to deliver less housing per dollar. I.e. worsening productivity. Is it possible that the economy has been arranged or arranged itself so that the increase in productivity in some sectors is offset by a reduction in others?
The point of this whole article is that deflation has a whole lot of bad results. Let us consider an economy that has healthy increasing productivity across the board. Is this bad? Clearly not; but in terms of deflation it would be seen as a disaster. How would this effect employment? The choices that I see are;
We can all have more stuff
We can work a bit less and have the same stuff, but enjoy the benefits of leisure, education and self improvement
We can work the same and have some different stuff
We can work the same and share some of the stuff with those who are missing out at the moment.

The obvious counter to all this is that such thoughts do not suit a bunch of very wealthy and greedy people, so they have manoeuvred to capture all the benefits of increasing productivity. This graphic illustrates how the fruits of increasing productivity has been captured over the last 3 and a half decades.
Some how housing has become tied up in this whole manoeuvre.

I think that this whole area is in need of some careful thought. Change will be difficult given the powerful forces rallied against it. Unfortunately this will probably only be resolved when things become so bad that an economic disaster and or mass uprising occurs. We may not be that far away from this. E.G. 1930 depression/ WW2


Why are we getting all this distorted info about deflation.

Inflation 3%
Interest in bank 3%
Less tax on interest paid
Money loosing value due to inflation
Is this a good deal?

Deflation 1%
Interest in bank minus 1%
Tax nil
Money increasing in value due to deflation

Who is better off?

Second point

Money in bank earning interest
Money leant out to buy houses
House prices go into bubble

No money in bank
No money to lend on houses
House prices fall

Third point
banks struggle to make profits in world of negative interest rates
Banks are dying anyway due to the blockchain

Excellent points well made Make B. Big thumbs up for you.

interesting, one of the guys from the big short was in aussie recently and has decide to short the big four banks as he can see a pop coming. if so then you would have real devaluation


I can get the devaluation but if you start stealing peoples deposits then you will have destroyed faith in banks for generations. Someone didn't think OBR through very well, after all fiat money depends on confidence and faith in government, they are attacking the very foundation of our economy.

You might have lots of money in the bank but a lot of us don't. I much prefer the days when I used to get a decent pay rise every year

finance rules, as long as the Aussie banks only need $2 of capital for every $100 they lend , your future is at risk as a wage earner.

That lend as a home loan and home owner.
Both definitions broad as you like.
It is the only game in town.
LVR who cares
Funds everything

It wasn't called trustee security margin for nothing. 66.67%

Andre - the "NZ" banks need more ?

Take a look at these headlines and let the readers know your thoughts about what may replace the anticipated regulator enforced movement of capital back to Australia.

Have the "investor" bank depositors been kept fully informed?

No money in bank
No money to lend on houses
House prices fall"

The ones with stashes of cash will put their money in land: huge swathes of it.
House prices could end up not falling because there could be no land available to build on.
Look at the situation before the industrial revolution in Europe: the rich owned all the land. if not the aristocracy (they owned villages, ffs), it was the church...
We're heading back to something like that.

A smart phone today would have cost billions of dollars 30 years ago.

It is awful that we can all aford one now.

Bugger this deflation. Would much rather pay billions for my smartphone.

As i have said before.
We are moving into "The Age of Empowerment"
Some say the Forth Industrial Revolution but that is like people in the 1700's calling the Industrial Revolution "The Forth Agricultural Revolution" - complete nonesense.

Recently i said your neighbour would have an AI robot who would be your Lawyer. But it gets better than that.

A 19-year-old made a free robot lawyer that has appealed $3 million in parking tickets

You're on a roll Mike B. Technology available to everyone makes this surely the best time to be alive ever. Especially if you're in business. (Sent from my Galaxy s6 with which I run 2 businesses while cruising on my yatch and is also a great navigation device, weather advisor, rain radar and more. If I'm ashore and my anchor drags the spare phone on the boat sends me a text to inform me. )


Too often deflation is the result of shortcuts; cheap electronics, foods, plastics from over there are often a result of real lax environmental, labour, and hygiene regulations.
Similarly here, we undervalue the environmental costs of our industries and put them onto future generations.

PNG is reportedly the largest hardwood exporter in the world at the moment, but its revenues are on average 30% lower than others that are flogging off the rain forests. I doubt its because its easy to log there.

Its all a giant garage sale, short-term cash-flows being sought at the expense of long-term sustainability, be it financial, social or environmental sustainability.

And Shrinkflation

Ha that too!

Last lot of pegs I bought were so thin and weak that they barely lasted a couple of uses! No they weren't the cheapest, but probably were the most brightly coloured!!

Takes a lot of skill and engineering to achieve such deception! What a great life's calling. Is that where all those MBA's are taking us?

It's been like that for a while. There's only so much stuff you buy cheap before you don't buy anything else. How many TVs do we need to buy? Does anyone buy media given streaming services are available?

All that additional capacity built with cheap finance will fail at some point. The low interest rates have only delayed the process from happening. Looks like loan defaults will shoot up rapidly this year.

RBNZ: "Survey measures of inflation expectations have fallen and are now consistent with inflation settling at 2 percent in the medium term."
Fact: inflation is actually 0.1%
Fact: inflation is never going to reach 2% in the medium term

only CPI inflation, not all inflation.
other inflation has been running at +2 for a while now leading to an even bigger distortion over time

CPI - the same measurement, which if it were 3.5%, the RB would be hammering an OCR of 5 or 6 to dampen it down... To achieve "price stability". That same measured inflation is now 0.1% & so is showing price instability.

a) The RB has picked CPI as the measure to work against. b) That measure shows the health or not of our economy and 0.1% is weak and in danger of a heart attack. c) there is little or no wage increases ergo there can be no real inflation. Meanwhile is some suburbs ppl have gone crazy with greed using debt/ d) the rest of NZ however is flat on housing. So what you seem to be saying is pick the worst case on the fly and ruin our real economy based on that.

no thanks

lowing the ocr interest rate is not going to do what you want to do, all it will lead to is more debt growth and misallocation into assets fueling inflation in the wrong areas not consumer spending as needed
ZIRP policy is a failure and those screaming for it here have not learned the lessons from overseas.
the way forward is tax cuts for the lower earned and infrastructure spending by the government
I would suggest a massive FHB building program


Unfortunately, without proper democratic scrutiny the RBNZ has turned New Zealand depositor's savings into a type of CoCo investment without the commensurate higher interest rate payment return. Read more

The four Australian banks' share prices have performed abysmally over recent months because of regulatory capital demands together with other perceived risk factors and yet the raised risk profile has resulted in NZ depositor's returns falling rather sharply in line with what can only be, at best, described as a mispriced swap rate market. It's no longer a CPI issue, but rather extraordinary risk that demands a higher OCR at this point.

So is now the time for depositors to flee?

If you think there will be OBRs next weekend, yes. I'd suggest however that we will see some warnings some months before OBRs happen. So I'd expect to see farms and houses being sold off as mortgagee sales in some numbers? at that point well I'd have my money out.

And exactly where would you put that money Steven?? assuming you can even get it, out ain't nowhere to hide?

Isnt this why you take professional advice? but a hint, Nicole Foss said "cash and cash like things" .

In my case I have a mortgage so making my deposits "disappear" is very easy. However I am not sure on how much back dating the OBR managers would do in the event of an OBR. ie they may just go back one or two weeks and reverse that transfer, unless its gone to a separate bank.

Meanwhile I am looking at cashing in my last private pension fund, much to the dis-approving comments from them, but then they lost 22-28% odd in 2008 for me.

YMMV may vary as they say.

Why are you carrying term deposits paying less than 3% after tax when you could be saving 5+% on the mortgage debt? Anyone worried about the OBR that has cash and a mortgage should use the cash to reduce the debt. Mortgages won't get frozen in an OBR event!

No, but they can call in a mortgage at anytime they feel. If the OBR is inacted those banks will be run on regardless as the faith for depositors will well and truly be eroded, thus the banks will need a plan B

"call in a mortgage at anytime they feel" very true from what I can see. However 2 or 3 ppl yes, 10,000 ppl? the banks would be commiting suicide. Its going to be very interesting.....

I dont mostly, I have already sold anything possible and paid down debt. So what is left is an emergency fund only. I dont see an OBR event tomorrow btw, I think it will be some months in the making and screaming obvious...

I know many opting for Bonus Bonds as it is not subject to the OBR scheme. Precious metals are still an option in the longer term. Or there is this thing called a "productive business" where they manufacture products and services that people need...;-). Apparently it has the potential to create jobs also. (tongue/cheek)

not for about 10 to 30 years. PS Also short term Govn bonds.

Agreed Stephen, but you're a brave man making that comment on this site full of over-leveraged home owners and property investors who aren't happy unless we have ZIRP in NZ, and then probably NIRP.

Not brave IMHO but part of the cause of the problem IMHO.

Interesting analogy between ASB deposits and CoCos, the deal is do a term deposit,(the bond) we'll give you 3% in a year, if a trigger event occurs (like house prices returning to normal), you lose the majority of your hard earned.

So pray tell me why are you so keen to crash NZ's economy? As fact (?), every CB that raised the OCR since 2008 nose dived their economy into at best stagnation or more commonly recession. So with such evidence before us, why do you want a lower OCR?

Not OCR but a higher retail interest rate, ie a risk premium, yes sure but that isnt what the OCR if for And why pray cannot depositors go into other investments giving them a satisfactory risk weighted return?

Anthony Wile: Let's jump to negative interest rates occurring around the world. Is this part of a move toward a cashless society? Will negative interest rates force electronic money?

Professor Fekete: Negative interest rates are just another manifestation of the destruction of capital. Negative interest rates are preposterous both in theory and practice, as are "cashless society" and "electronic money."

Anthony Wile: Do you agree that cash is outdated?

Professor Fekete: Cash will never be outdated because, by definition, cash is just the "most marketable" asset.

Anthony Wile: Is the current economic mess a planned one or did the central bankers miscalculate?

Professor Fekete: It is the direct consequence of the absurd Keynesian doctrine that central bank open market operations can create wealth out of nothing. It ignores how bond speculators react to central bank action. They join the central banks' bidding orgy for government bonds, thus increasing pressures to suppress interest rates. You can hardly call a faulty and thoroughly unsound theory "central bank miscalculation."

Anthony Wile: Is gold headed for a breakout?

Professor Fekete: Gold is headed for permanent backwardation, which is characterized by a negative basis. The price of gold is fading into meaninglessness, as no one will be willing to sell any amount of gold against irredeemable currency payment, not even gold mining concerns.

This Is What Happens To Gold When Citizens Lose Faith In Fiat Currency


An article that really made no sense.

The author spends some time explaining how negative interest rates are bad and weird for both the financial system (banks) and general behaviour, before asserting that we must fear deflation. Nevermind that interest rates are negative only because people are trying to "cure" deflation! (erroneously i might add).

So which one is it - does he want us to lower interest rates or not?

Or maybe he's actually hit the nail on the head and realised that negative interest rates actually REINFORCE deflation?

as per japan, has not worked,

Yes Japan is in major trouble. Greece has also experienced deflation directly due to ECB policies. Interesting reading about people in expensive business suits searching rubbish bins for food.

Going into the depression again is not a good solution. There needs to be a more balanced approach.

In reading this article and the comment stream following I can't help but think that most people have lost sight of the original purpose of banks. That is by pooling individuals spare money, it can be put to work somehow and generate a return. The bank takes a minor cut of that return and the rest goes to the individual. Negative interest rates are about the cost of money from the central bank - in other words, as I understand it, the central bank is paying banks to get money into circulation to generate some growth. Negative interest rates are not supposed to be an opportunity for banks to charge their customer base for storing their money. this would be counter productive.

Fundamentally though isn't this all about a failure of Friedman's monetarist theories and arguments against regulation?

We're all part of this experiment. I'm sure some new conclusions will be discovered as this plays out. Such as low interest rates eventually create a liquidity trap. The cheap money keeps loss making excess capacity afloat. Instead of reducing capacity it remains until eventual financial collapse.

At the moment the world seems deflationary so debts are real dollar for dollar. Housing in the US is a rather poor investment and that may end up affecting us sooner or later. It's best to hold cash or inflation adjusted US Bonds. Gold is really bad (worse investment than usual) with deflation.

All the signs are there and central banks aren't taking the action necessary, instead they are following the lead of Japan.

Friedman was always overly obsessed with the free market. The free market can turn to crap without appropriate regulations in place (see the sub prime crash in the US). People rely on the "invisible hand", which is reference to the hand of God. Having too much faith in economic beliefs just results in making a new economic religion.

Yes , but everybody has bought into it. JK clearly believes in a 'hands-off' approach, despite all the evidence of damage that a lack of regulation produces. So Friedman's views appear at least to be the dominant perspective. The free market is also a mantra that many commentators on this site recite repeatedly, despite the evidence that it doesn't work when people or organisations (still comes down to people) are able to manipulate it. Balance is required and that can only be provided by Governments regulating to serve their constituents and nations respecting others rights to their own economic policies

Everyone buys into neoliberalism. The problem is unless you research and understand what is going on you can't filter through the bull.

National say hands off, but their government departments have been implementing heavy and absurd regulations which resulted in the DIA producing the Loopy Rules Report. One of my submissions that a sentence or two quoted in it. The way the Government is operating is they are the most left wing right wing party because they don't understand what's going on.

It's tough to have a free market when National is heavily regulating markets without explanation. In fact I emailed the Minister of Building and Construction on Thursday but I have not received a response. I guess two tough questions aren't easy to answer.

What the Government needs is a new economic superstar to show them the way. The problem is for National the latest superstar is Thomas Pikkety but given that his ideas are leftist in nature they will ignore what he has said.

Unfortunately there's not a lot we can do as individuals except invest in such a way so as to protect ourselves from a deflationary environment. I will do what I can to push for a loosening of regulations to try to get more jobs in the construction sector (to put some inflationary pressure on). I have doubts about the responsiveness of the Government though.

Good luck! In the meantime we've been signed up to the TPPA which is essentially more of Friedman's ideas at work as the yanks try to dominate the markets and ensure that it's corporations cannot be shut out by a Government trying to protect it's own markets. the economic version of what it was doing in south and central America in the 50s, 60s, and 70s.

Not me.

From the RBNZ website, in a John McDermott presentation, describing inflation' as a thief in your wallet.'

GFC is still with us, in a more insidious form, depleting all wealth silently and surely.

Bingo! 2008 onwards has been nothing but a smoke screen of economic delusion.

And this will increase inequality and possibility of class wars.


Yes the moneyed elite thought they were so clever, but now their vehicle has had brake and steering failure all at once. The ride gets interesting from here. Unfortunately it will be the people at the bottom who'll get burnt the most.

Maybe....I agree there is huge disconnect, somehow making money by purposefully collapsing ppls lives, companies, nations and even the global economy to make even more millions seems perfectly reasonable. Whether the poor will stay at the bottom is another matter, there are a lot of them/us after all.

Once again, tunnel vision on symptoms/ignoring the cause.
If the system doesn't have the capacity to take on more debt, then attempts to force the system to take on more debt, can only have negative consequences. Lets not forget the greatest irony of all, which is that relentless pursuit of ever increasing debt, has led us to this point in the first place.

Tell that to Auckland homeowners.

Deflation is a symptom of over-indebtedness. Falling interest rates are a symptom of deflation. Bank collapses, cash bans will be the symptom of negative interest rates. It's completely uncharted territory. Do the baby boomers really think they will have the same pension rates in 5years? Do property speculators really think they won't have a capital gains tax in 5years? Does the rating agencies really think nz nominal GDP will be higher in 5yrs? - if not how will that impact the dent/GDP ratio? When growth finally tanks will the immigration boom continue? If you want to prepare, the number one goal is to reduce debt. Banks and nzrb don't like people who reduce their debt because their actions are naturally deflationary in nature. Hmmm deflationary debt repayment. Interesting.

The person at the bottom is the 15yr old who will seek a job in 3yrs. That generation will pay all our debts for us on top of a renewed revenue grab aka interest on student loans in the name of austerity. And funnily enough they don't even realise the impact of an 8year national govt on their future high tax rates. The nation has been loaded up with debt by the govt, by the housing speculators, by the buy buy buy credit culture and by short-sighted over expansion in the dairy industry. Why has a prime minister that is sofinancially prudent with his own money, managed to destroy and pilliage the assets of this nation? And they portray themselves as good economic managers. Their 2008 campaign motto should have been "promising you a lost decade" rather than reflecting on one that never was...80billion govt debt. 80billion govt debt. 80billion govt debt.

The 80billion debt however was taken on to avoid a "lost decade" ie keep the Govn from massive austerity which would have made things even worse.

2008/2009 was a mistake but I think we'll repeat it again as we'll want the promised tax cuts, just like then.

The 15yr old is actually even worse off than you portray, yes he'll be lucky to get a (decent) job plus with peak oil and CC be facing a seriously buggered economy he'll have no hope in. I expect then he'll (as a generation) default on several obligations like the OAP and Govn debt and I'll not blame him.

"Everyone agrees that deflationary expectations are a bad thing, which is why our Reserve Bank watches inflationary expectations very closely for any signs they are losing their moorings and starting to fall towards zero, or lower."

Sounds like a diktat... maybe he meant ..." Everyone 'must' agree that..."

Didn't ask me. Anybody remember 'agreeing'?

There's a lot of people outside the inner-herd of economists that said this outcome was an inevitable, and unavoidable, result of the central planning interventions for corporate welfare.

The free market is as mythical as Peter Pan; just ask the BOJ.

“Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.”

Money doesn’t have to be “hard” or “soft” or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch. But the new money was a phony. It put the cart ahead of the horse. This was money that no one ever had to break a sweat to get. It was based on credit – the anticipation of work, not work that had already been done.

Money no longer represented wealth. It now represented anti-wealth: debt. So, the economy stopped producing real wealth.