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Aaron Drew says ending inflation targeting would be throwing the baby out with the bathwater as monetary policy under an inflation targeting regime can be set with concern for asset prices, the exchange rate and other factors

Aaron Drew says ending inflation targeting would be throwing the baby out with the bathwater as monetary policy under an inflation targeting regime can be set with concern for asset prices, the exchange rate and other factors

By Aaron Drew*

Last week the RBNZ cut the OCR once again, to a new record low of 2% for the overnight cash rate.

In this, of course, they are not alone. The Reserve Bank of Australia also cut rates to a new record low of 1.5% at the beginning of the month, and many economists expect that rates in Australia and New Zealand will fall further still towards levels seen in the large advanced economies.

Zero and below here we come?

Will Rogers, an American cowboy, actor, comedian, author and newspaper columnist in the 1920s quipped: 

“It isn't what we don't know that gives us trouble, it's what we know that ain't so.”

Behind these extra ordinary moves is a core belief that central bankers hold around how their actions impact the economy and inflation.  The so-called monetary policy transmission mechanism. When the OCR is cut, the belief is that this will cause inflation to rise through two main transmission channels. The first ‘direct channel’ is that a rate cut causes the exchange rate to fall, which increases the price of imported goods and hence inflation. 

Last week we saw that this did not, in fact, occur.  Markets had been expecting a more emphatic easing path, and hence the exchange rate (an asset price that bakes in expectations of interest rates in New Zealand versus abroad) rose. This would be disappointing, but hardly surprising for RBNZ policy makers. The linkage between short-term rates changes and the exchange rate is tenuous, and the text-book response does not always occur.

The second, and usually more reliable and important ‘indirect channel’ is through boosting economic activity, including household and business spending, exports, and the fortunes of firms competing with imported products and services. One important part of this part of the transmission channel is via asset prices. A cut in interest rates, and the transmission of this to longer term rates, in theory should boost asset prices because it reduces the discount rate applied to their earning streams. In turn, this should lift household spending via a ‘wealth effect’, and potentially business investment because it increases the net asset value of the firm (relieving balance sheet constraints on borrowing). The overall lift in aggregate demand is expected, in time, to put upward pressure on inflation.

As a former central bank researcher and provider of economic modelling services to a number of central banks globally, I have some claim to suggest that this orthodox view is ingrained and very widespread in central banks. It is codified in their macroeconomic models, and a key part of the narrative that is used by policy makers to describe how monetary policy impacts the economy.

But the orthodox view is beginning to be challenged because inflation and household spending remains weak globally, despite record low rates. Recent OECD economic data, for example, shows household savings rates have in fact risen over recent years in countries such as Germany, Japan, Denmark, Switzerland and Sweden where interest rates are now zero or negative. They are now in some cases at their highest recorded levels since the OECD began collecting the data in 1995.[1]

Two key arguments are made as to why cutting rates may be making things worse rather than better. The first is essentially a confidence argument. Cutting rates to very low levels, and in the extreme case to negative levels, signals that things are very wrong with the economy. Households and firms react to this by pulling-back spending. For example, in the case of the Euro Area, Deutsche Bank’s Chief International Economist, Torsten Slok, argues that:

Normalizing rates would be seen as a positive signal by consumers and corporate investors. The longer the ECB persists with unconventional monetary policy, the greater the damage to the European project will be.

The second key argument is that cutting interest rates to very low depresses, rather than boosts, household spending because the negative impact it can have on savers and the retired outweighs positive impacts elsewhere.  In a recent speech, Yves Mersch, Member of the Executive Board of the ECB comments[2]:

…we need to be aware that there are distributional consequences of our actions – and these may well be particularly significant at times of exceptionally low interest rates…

When rates are extremely low it reduces the income streams from financial assets (such as bank term deposits, bond yields, and the dividends from equities). This means that people who are no longer working that rely on these income sources have less to live on and less to spend (unless they choose to “eat” their capital). At the global level, McKinsey estimates that housed net interest income in the US and Euro Area has declined by a staggering $630 billion as rates fell over 2007 to 2012.[3]  Clearly the cumulative impact is larger still now. We are seeing more and more people coming into our advisory practice because they are extremely upset over RBNZ actions and the fall in income they are receiving from bank term deposits.

For savers looking to build a retirement nest egg low rates mean that they have to save more and for longer to build a sustainable income stream, reducing the amount they can spend today. In addition, low rates have boosted asset prices globally, which reduces the return that can be expected from financial assets in the future. Asset consultancies, pension funds and financial advisers generally expect to see much lower future returns than what has occurred over recent years, and are warning that savings levels need to significantly increase in order to prepare for retirement despite the boost in asset prices. This message may be getting through.

For young savers looking to purchase their first home, low interest rates in New Zealand have arguably been nothing short of a disaster. The rates cuts we have seen have no-doubt significantly contributed towards increased house prices – surely this is the elephant in the room regarding the “housing crisis”. The RBNZ has reacted to the financial stability risks from over-valued housing by increasing required loan-to-value ratios. This means young savers have to save even more to build a deposit in an environment where the return from savings is also lower.  A double whammy impact on the amount of income they have left over to spend today.

The key question the above points beg is whether the transmission mechanism has weakened, or even changed sign, as we have entered a very low interest rate environment?  

From a central banks perspective this should be seen a classic “empirical issue”. Interest rates are a blunt tool for managing aggregate demand and inflation, and how interest rates impact different sectors of the economy can’t be fined-tuned. But ideally what any central bank should have is a clear understanding of the distributional impacts, and how this aggregates up to the overall impact on demand. Unfortunately scant empirical research appears to be available on this potentially crucial issue. For example, at a recent conference hosted by the Brookings Institute in the United States[4] on what we have learned from negative interest rates the distributional impacts were barely acknowledged, and how this could interplay with demographic profiles was not raised at all. 

Given the challenges of running monetary policy in today’s environment some economists and commentators have called for the end of inflation targeting, the dominant policy framework that monetary policy makers operate under today.  In my view, this is throwing the baby out with the bathwater. Monetary policy under an inflation targeting regime can be set with concern for asset prices, the exchange rate and other factors. This is explicitly the case in New Zealand with the current Policy Targets Agreement.  

Others have questioned the judgements that the RBNZ has applied over recent times. As discussed in an article September last year,[5] my view was that rates were already too low given the strength of the domestic economy and if rates were cut financial stability risks could rise given the likely intensification and spread of the housing bubble from Auckland to other parts of New Zealand. But I hasten to add that challenging judgement is an easy accusation to throw from the side lines. Policy has been cut because inflation has been unambiguously below target, and the balance of risks are never clear ex-ante.  It would have been, and remains, a very difficult task to balance financial stability risks against potential debt-deflation, external imbalance and global risks. 

The third alternative to the conundrum facing the RBNZ and other central banks today is to take more seriously concerns that the transmission mechanism could be working differently when rates are low. Or to paraphrase Will Rogers, it’s the things that we believe are true that ain’t so that create the real trouble.

Aaron Drew is an Associate of the NZIER and Chief Investment Officer of the Stewart Financial Group.  He has worked as an economist at the OECD and held senior positions at the New Zealand Superannuation Fund and RBNZ.

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... it wasn't so long ago , 10 years or so , when Don Brash as Governor of the Reverse Bank held interest rates intolerably high , and crushed the growth out of the economy , in order to meet his 0-2 % inflation mandate ...

Now , we have a Reverse Bank presiding over record low interest rates , allowing a rampant housing bubble to dominate the economy , in an effort to get inflation up , into the mandated 0-2 % ....

... what's the magic contained within that 0-2 % inflation band ... do they give Wheeler a Gold Medal or something ... ... it had better be good , whatever it is , to cost us all so very dearly ...


In simple terms the theory around the band is really in allowing small inflation to inflate away old debts and allow a controlled level of growth as required by a debt based system . ie so there isn't massive misallocation of capital and big boom busts .. but its laregely irrelevant now because resource wise we are at the end of real growth. So we are left with money printing and greater fool economics to keep the Ponzi temporarily ticking.

Don Brash was Governor until 2002 - a bit more than 10 years, or so.
Plus, he didn't kill real GDP growth in New Zealand.
The targeting band is 1-3%, significantly different to 0-2%.

The reason for a positive inflation target is primarily to maintain a positive balance of output, over the medium term. This obviously being preferential to the counterfactual.

Don't let the truth get in the way of a good story.

Amidst all that very educated and logical perspective, I could sense that Aaron Drew saying that human behavior is not working as it's supposed to.

My fav quote about Economists : They see something work in practice and go on to research whether it will work in theory also.

Unfortunately changing our OCR has very little effect on how the world treats us.
It’s like an asthmatic mouse blowing out a house fire…

We have one of the worlds most traded currencies and because of this demand we have very little control over the price that our currencies is traded at. As long as our interest rates are higher than our neighbours, we will continue to be in demand.

If the Government was serious about fixing these issues, they would look at using QE to directly fund the infrastructure upgrades (And housing) that New Zealand needs. Kill 2 birds with 1 stone.

Good points about the exchange rates being driven by forces outside NZ.

However, QE is a terrible 'solution'. More debt, in the form of QE, is not a solution to the problem we have here, a problem of low growth and inflation caused by to much debt. Fighting fire with fire only makes the problem worse, just look at japan as the pioneer of stagflation and treading water.

Keynesian economics are what got us into this mess, and more of the same will only make it worse.

What does one do ?

We have zero debt , no mortgage , no credit cards , no vehicle finance , a paid up share portfolio and we are sitting on a pile of cash ( now in Bonus Bonds ) because I don't know what to do with the stuff

Property prices are way too high and I don't want the hassles that go with tenants

The stock-market ( along with all other financial asset prices ) have skyrocketed beyond fair value

Bond Yields are too low

TD rates are appalling

That leaves nowhere to put the spare money

One wonders if such money should be going into venture capital.

Conciser changing your mindset from trying to multiply money, to conserving your purchasing power.
As you say, returns are dropping, and in many parts of the world bonds will return you less capital than you put in.
Put your spare money into an asset class that can not be debased by bankers and governments, which yields no returns, yet provides a safe store of value that doesn't go negative. Gold and silver coins function well in that role.

Gold frequently goes negative and what about gold is a safe store of value? Because gold changes value regularly it is a volatile asset, read as risky.


"which yields no returns,yet provides a safe store of value that doesn't go negative" Are you trying to make the case that the price of gold and silver Never falls? I cannot understand why people buy these commodities when they not only have no yield,but come with significant costs and are volatile.
I have been an equity investor for over 40 years,both in the UK and latterly here in NZ,concentrating always on dividends and that approach has served me well. I have never owned commodities and never will.

You would have either A) commodities B) private businesses C) collectables or Gold or similar E) hedge anything so the bet is on comparative change not absolute change. That said given you dont want the hassle of tenants i doubt you deserve a return. Just lazily investing in 'what ever is easy' never yielded well long term anyway so id suppose youl continue to produce next to nothing of value from your assets and that seems pretty fair to me.
Ummm hey guys I cant seem to make a bunch of money for free and im really upset about it, change stuff so i can make money for free okay, thanks.
p.s. Bonus Bonds lol

Your reply is a bit of a troll and actually rather condescending . Not everyone wants or needs the hassle of dealing with tenants. Long term investing is not following any fad, but adopting a constant, consistent approach.

Im glad you picked up on the obvious there, when someone has a big cry about not having an easy time making money for free they get trolled. And no, long term investing is simply buying things and not selling them often. It is not a 'consistent approach', indeed you would hope that over long time frames your approach changes as the markets required. Doing the same thing day in and day out is simply ignorant. Your definition of long term investing is actually just lazy investing.

Why - do you think you can beat the market (any market). Bloomberg recently looked at people trying to time the market - apparently there are several websites where you can simulate this from data over the past 30 odd years - but people attempting to time the market generally were worse off than those who purchased and held.

Avail us of your pearls of wisdom or are you just another arrogant ignorant troll ,,,,

Yes you can time markets but no im not saying that the OP should. I simply pointed out what long term investing actually is, buying and not selling often. There isnt much wrong with that. What is wrong is a bunch of adult babies having a cry because, funnily enough, it takes lots of work to make decent gains. Yes the environment is challenging but there are absolutely opportunities in abundance. So im sorry that said adult babies may need to actually add some value by housing tenants or, god forbid, do some research in to the rich and diverse investment opportunities out side of walking in to the local bank. Its not their fault the global economy is a mess but it is their fault that they cant be bothered figuring out what to do.

BadRobot will always be able to think of a reason why it wont be a good to invest in something. What if there is a volcanic eruption or an asteroid strike? Honestly don't bother, it'll just do your head in.

I never said anything about not investing - just invest with your eyes wide open. You seem to make assumptions and create a logical argument - but can you prove it.

Spend it, have a good time!
If all is setup the way you want it., which it sounds like it is, go for it.
Life is there to enjoy.

You make a very valid point. Often overlooked. Especially by Politicians

what about charity? good emotional returns from there.

Spend it? Life is short. Get it out of bonus bonds for starters? If you're not wanting to start a small business or anything then why not provide small business loans with that spare first world problem you have? Via peer to peer lending maybe?

A world cruise with pina colada's is more suitable for retired folk.
Let the youngsters sort thier own stuff out.
P2P lending sounds like a scam.
There will be a few winners, who will cash out early, and many, many more losers in that game.
Banks haven't been around for 300 odd years without learning the rules of the game.

Moa man,

P2P lending is another disruptive technology,like Uber and Air BnB and can be done well or badly. Harmoney has made some poor decisions,but I see no reason to believe that it is not a genuine business. I hope it and other P2P lenders succeed,as that would benefit many individuals and small businesses.
Being a bit of a pedant, I can't resist pointing out that coladas is a plural not a possessive and should not have an apostrophe.

Keep it under the mattress like the big money people are. But like every idea there is risk. in this case a burgular might come in and steel it.

With inflation so low one does, at least, have the reassurance that your savings are (approximately) holding their purchasing power.

The problem most people dream of having. Have you considered p2p lending? Worst case scenario would be you no longer had to worry about where to put your money.

Nothing wrong with P2P Lending if you are prepared to learn how this type of investing really works.

Its not at all obvious that the counterfactual? is not preferred. The world operated in a state of mild deflation for most of its monetary history. There is nothing strictly unfavorable about living costs slowly dropping, it is in fact the natural representation of advancing productivity. Increased efficiency reduces cost.

What period was this when we operated in a state of "mild deflation for most of its monetary history"?
Because that sort of contradicts any notion that sustained growth has occurred..

If you would prefer a deflationary spiral, fair enough. However history has told us that the wisdom of masses prefers the pursuit of increasing standards of living.

Your proposition makes sense only under the condition that overall consumption also drops with production costs. Unfortunately this isn't the case over the medium to long term.

Laminar is spot on. The natural tendency is for prices to decrease, which we call deflation. People see a need, they produce more of a goods or services to fill the demand, and the price of that goods or service decreases from competition.
Deflation is great for consumers. Deflation is bad if you hold debt, as your debt will be harder to pay back. So who stands to loose from deflation? Governments with debt, and banks (who get left holding the bag when the people they lend money to cant pay it back).

Additionally, we have had decades of increased living standards as a result of technological improvement. This dynamic has operated independently of growth, which has been fueled increasingly more by debt (especially since 1971). If it wasnt for all the technological improvements, then our living standards would have been decreasing the last 40 years (as average living costs have increased, but average inflation adjusted wages have remained flat).

Workers suffer the most from deflation. Price of goods drops, with less money coming in there's less money to pay workers. Workers have less money and spend less leading to the price of goods dropping. Deflation is great for consumers who are not workers.

Have a look at what happened in Greece.

Finally, someone who understands lag time effects.

Just pointing out the obvious here: if prices of goods fall, but you sell more goods, then prices can fall but profits can rise. That this basic reality escapes you is a tragedy.

You miss the point completely.
If our propensity to consume and save/invest does not change, then we are not seeing any potential for deflation.

As for your other point; the "tragedy".
Given that any logical seller/producer/whatever produces at a point of MC=MR, I cannot see how, given the same demand conditions, profits can be higher...
To quote you, "That this basic reality escapes you is a tragedy."

hehehe, i mean you know why most demand curves are downward slopping yeah? Have you ever been to briscoes during a sale vs briscoes on any other day? Thats right as prices fall demand goes... you can do it. come on now. Lets try again, as price comes down, demand goes?
Lets try it another way. If i double the cost of mazdas do you think i will sell more mazdas or less? Okay, so now if I say, halve the cost of mazdas, then maybe, just maybe id sell...

haha, wow, be condescending when you are wrong - nice.
Again though, you miss the point of propensity to consume being unchanged..

Sure, special sales occur - these aren't the norm, and game theory is another complication which may skew short term. Medium to long term, prices converge to an optimal point where MR=MC.
Just because quantity demanded goes up, it doesn't mean that profits do...
Do you want the maths? I think most people learnt this in 6th form Economics, or something. We can teach you though, I'm sure.

It is interesting .
Can we ( say a household ), buy more stuff today with our wages, than 30 years ago ?
I would say more , but is this because of inflation or deflation ?
( if I am wrong about more it is because I wasn't alive 30 yrs ago :)

Judging by this thread, it all depends on whose dodgy rhetoric you want to believe..

The money supply has increased, called inflation (m0-m3 inflation).

The price of a computer for example over the last 30 years has decreased, from 10s of thousands in the eighties, 1000s in the nineties, and hundreds of dollars from y2k. This is deflation of prices, due to technological improvement and innovation, competition and scale. This trend is easy to see, without needing to take info account inflation adjusted prices.

In the seventies, you could buy a house for a few years of wages. Now it takes many more years of wages to buy a house (to keep it simple lets say for the same house not a new one). House prices have increased-> house price inflation. This is due to money supply inflation (at decreasing and more affordable interest rates) House price inflation has not matched wage inflation.

The world is not black and white, and most of these arguments occur because we dont clearly define our symantics when making a statement.
In the 1950s, a man could work, and make enough money to support a wife, 3 kids, morgage, car, etc. Now two people working struggle to do this. More could be brought back then for your wage. However, over the same time period, technological improvements have been made, and the quality of products/lifestyle has improved. These are two dynamics acting independently of each other (M0-M3 inflation, and tech improvement), one has masked the other.

This idea that behavior doesn't relate to price is retarded. As prices fall demand typically rises. Its obvious. Your equation MR=MC isnt the optimum price for an economy, its the point of maximum profit for a firm. Its like a word salad of miss-matched concepts talking with you. Competition will force companies out of sweet spots on that curve such that businesses that find ways to produce more goods at a lower cost will out perform those who try to stick to maximized profit curves. As prices fall and consumers abandon the profit maximised business in favor of the more efficient business, both the consumer and the more efficient business win. The legacy firm with its head stuck up the arse of maximized profit curves dies and its resources, both human and otherwise are recycled in the beautiful process known as creative destruction.
*drops the mike on the floor and swaggers off the stage*

Yes, we call a decrease in prices deflation. However, it doesn't mean anything if propensity to consume does not change. Cheaper products are superseded by new products in order to maintain supernormal short term profits. Sure, they are cheaper but the consumption allocated to their purchase is still utilised, instead of saved..

If you are trying to frame inflation as some government conspiracy, you lack of logic makes much more sense.

How does technological improvement operate independently of growth? - the two are endogenous/a function of one another in classical growth theory.
"If it wasnt for all the technological improvements, then our living standards would have been decreasing the last 40 years (as average living costs have increased, but average inflation adjusted wages have remained flat)" - please make up your mind on what you are saying. You can't state that prices have been decreasing and then say within 2 paragraphs that average living costs have increased and then say that real wages have remained flat.
It makes less than no sense under relativity conditions. Unless you have come up with an alternative to our incumbent Keynesian system.

Deflation was the state for most of monetary history because the money supply was reasonably inelastic. As more is produced prices fall. As prices fall consumers tend to purchase more.
Inflation isnt caused by governments in the main, for the most part its caused by commercial banking expanding the money supply. No idea what your talk of conspiracy relates to but its possible you dont understand how money is created.
Technological improvement is complex. If it grows productivity then its a saving, if it increased the cost of a product then, like advertising, it is a cost. You can separate technological improvement from growth quite easily by removing the part of the deflater that represents technological gain. You can do it because technological gains that aid productivity show up as more goods sold and technological gains in consumables show up as part of the cpi adjustment under hedonics. strip out the hedonics and you strip out the part of technological gain the poster was referring to. Its really very simple. Hes saying if we strip out the hedonic adjustments the middle class probably went backwards.
Again, there is nothing inherently bad with mild deflation, its actually very slimier to mild inflation but one favors debtors and the other favors workers.

"You can't state that prices have been decreasing and then say within 2 paragraphs that average living costs have increased and then say that real wages have remained flat."

OMG, you really have no idea Mr economics 101. Our Keynesian system is failing slowly but surely if you haven't noticed.

YES he can...... because of a little thing called "CREDIT". All those things can be happening at once.

'Living costs' are not just about the cost of 'products' whether new or old. Just because an iphone may drop in price has little reflection of ACTUAL "living costs" why, because an Iphone like 99% of all consumer products is not actually a 'necessity' of life. What is nymad?

shelter? food? water? warmth? (a job? a wage/salary?)

Which of those things has gone down in price over the last decade?say, or any decade since the introduction of Fiat currency and Fractional Reserve Banking?

The first and most important one: the cost of having shelter, whether owned or rented? Which way have costs gone? whether for a borrower or for the 100% cash buyer?

Due to shortage of supply? demand? or..... are just more homes in fewer owners hands these days creating an illusion of a shortage simply because some people are being catered for better by a focus on priming an economy via 'access to CREDIT' ?

Utility costs? which way have they gone?

Have wages increased in direct equal proportion to those increasing living cost examples? For many....the answer is "no", they have not. Hence the out of whack income to borrowing ratio's like never before!

So what's wrong with the picture here?, what options do people use to sustain themselves, survive, kept warm, pay the bills as cost become higher than their incomes?

Credit? what is "credit" nymad? hows it created? Is creating money from 'thin air' inflationary? yes, it most certainly is...because it devalues the buying power of that FIAT currency every second of every day, year after year as soon as someone uses it. Credit can be unlimited, that's a serious flaw in the system.

My parents built their first home for $2000 back in 1968, paid another $2000 for the section. How much you reckon that house would cost to build, maintain, and live in now due to 'inflation'? INFLATION. That increase has nothing to do with just...... 'supply or demand'. But it does have everything to do with the fundamental economic flaws of 'Fiat currency' and 'Fractional Reserve Banking systems!

That being....... how new money actually comes into existence via these systems, where most of that new fiat money goes, how it's spent then redeposited,then loaned out again , on and on it goes... meanwhile most get poorer year after year as consumers and citizens ( particularly between generations) because wages never completely cover all the new inflationary costs associated with where primarily that 'funny money' ( credit) goes

There is a major difference between economic theory and reality for most people, knowing the "lingo" or economic "jargon" means very little when faced with actual circumstances

well said Justice... I pretty much agree with you.

...You do know that we can model money creation, right?
And, credit can't be unlimited.

Sure fiat currency might be the issue, however what's the alternative to it?

I'm not vehemently against everything you say, I just want you to propose some legitimate alternatives to the tools that you readily criticise.. All too often it is just scorn reminiscent of some band-wagon rhetoric that you preface with economists being out of touch of reality.

Uhh, models don't always reflect reality accurately. If they did then maybe some of your heroes like Greenspan, Bernanke, Summers, Geithner, Bollard etc might of seen the GFC coming. For many people economics is not just a game of monopoly. It can be life or death, hope or hopelessness, freedom or slavery. Do economic models really reflect such things? As for wanting me to present you with alternatives to our history of failed human economic experiments, i can only say to you that nature itself has no need for the concept of money. We are products of nature are we not? You have your answer, but most can't accept that simple fact. As a species we will fail unless we change our entire value system

Yep, true, the GFC wasn't foreseen to hit when it did.
True, nature has no need for a system of money/debt. However, it does need something as a method of exchange, and always will. Currency has evolved to be that tool.
To suggest that we regress back to a system mimicking the natural world is not really a valid proposition..

Lots of people saw the GFC coming. Its actually fairly easy to fix a big part of the problem. If you require a bank to actually receive a deposit before it can make a loan then half the issue goes away. The result of the change is that deposits become scarcer and interest rates rise. If you want to know why the BoE released a paper very recently that pointed out that the majority of money is created when a commercial bank makes a loan. Essentially it was the nail in the coffin for the crew who claimed deposits are made that then allow a loan to be made. This assumption is core in many Dynamic Stochastic General Equilibrium models that reserve banks rely on. As we now know it is in fact loans that become a deposit at another institution and are then borrowed back by the original lender. Time lag for the process to complete means that reserve banks need to offer overnight liquidity functions, or repos. Because a bank loan creates a deposit the bank has no need to pay mums and dads a bunch for their deposits. Forcing banks to obtain the deposit first means more demand on scare deposits and interest rates rise. As rates rise asset prices fall. Now who does this hurt? As Thomas Piketty proved in his noble prize winning submission Capital in the 21st Century, as asset prices rise relative to GDP it is the very wealthy who come to own them. As prices of assets fall the assets redistribute in part to the middle class.
Deposits before loans, easy enough.

Some of us saw the GFC coming as early as 2006, some of us were writing to Bollard as early as 2003 warning of the problems that can come from rapid house price inflation being aggressively incentivised by too lower interest rates. But who are we too these socalled 'experts'? Well, we were proven correct.

So you were writing then? could you provide some evidence by chance? The likes of Steve Keen were certianly predicting this wasn't going to end well, he was only one of 9 apparently, seems we should make you number 10?

If I recall correctly the RB was telling successive Governments that there was a problem which Helen Clarke and M Cullen ignored. I terms of rapid house price inflation this was not occuring nation wide but only significantly in one city and only part of it.

Steven, hundreds of people predicted the end result at the time! You do your counting via media story only?
I do still have those emails to Bollard yes. Even you know that a house built with no real foundation will fall over right? Its not rocket science

Through 2005 to 2008 I followed several blogs devoted to the USA housing bubble and subsequent crash, and the general rule was that there were plenty of people and commentators who saw it for what it was and were very accurate in their predictions, but they were outsiders, and so easy to ignore, and regarded by media as kooks. Insiders in the real estate and financial industries were deep in the Kool-aid, but they got all the quotes and interviews in the media.

The likes of Steve Keen certainly predicted it, but yes the actual timing was unknown.

Yes, but not in the way you believe IMHO. Simple math shows the grow expotentially for ever model on a finite planet isnt going to work for ever. Money is a lubricant for an economy but energy does all the work and its lack of energy that will see us fail within 30 years give or take 20.

Given the challenges of running monetary policy in today’s environment some economists and commentators have called for the end of inflation targeting, the dominant policy framework that monetary policy makers operate under today. In my view, this is throwing the baby out with the bathwater. Monetary policy under an inflation targeting regime can be set with concern for asset prices, the exchange rate and other factors. This is explicitly the case in New Zealand with the current Policy Targets Agreement.

In Japan CPI inflation targeting threw the economy under the bus, while the central bank cornered the stock market.

Japan Q2 GDP Misses, Unchanged From First Quarter, As Business Spending, Exports Slide

The Bank of Japan's Unstoppable Rise to Shareholder No. 1

It's critical that Government intervention is used in Japan's stock market. You don't want capitalism to be involved in markets.

The the facts are not fitting the theory. Maybe the government and the Reserve Bank know better and it is the facts that are wrong.

Monetary policy does not work when central banks say "please pass on the full rate cut" and banks say no. That provides zero stimulus to anyone. If the banks were not going to pass on the cuts he could have well left the rates where they were.......

Housing loan rates are not the only factor in play. To have a real effect on the streets, the credit card and other loan/finance interest rates need to be lowered a lot, to boost spending. We don't need more house buying because that is not reflected in the inflation index, right ? It is the other day to day buying that will be fatored into the inflation index. So banks should be asked to reduce all lending rates, especially the unsecured rates...

You want more inflation, give each one of us $5k to spend. Job done. Depending on what rate you want the inflation to be, you can jack up the amount you distribute.

Yes and shortly there after the money will be back in the hands of the people who caused the problem in the first place. Big no to Helicopter money

The money is already going to those who are accumulating it anyway. Instead of say adding $15b per month in mortgage debt just give every adult $7500/month. It's the same money but we would get inflation and the money would circulate through the consumer economy. Meeting the inflation target would become effortless, and the realisation that there doesn't need to be that much new money created each month would become obvious.

The helicopter money is there already, it's just being air dropped to those that don't need it.

Yes, it is given to the already rich, banks, etc and then ends up in the stock market or overseas property investment only. The ordinary man does not benefit.

If I am given $5k and if I spend it, then I benefit, right ?
If the economy and the seller also benefits, that is also good, right ?

As a one off, yes.

Incorrect, the path the money will follow will stimulate the economy as people spend so the people benefit in the first instance unlike QE where only the banks benefit. After that we should be jailing these banksters.

This failure to do so comes back to us as the voter.


Are you sure? What if many just save all or most of it,either directly or by paying off debt? If I was given that amount,I would give it to my sons with the suggestion that they use it to pay down their mortgages. How would that be inflationary?
Even if most actually spent it,what evidence do you have to show that this would be inflationary? I suspect that you have none.

$5k to each citizen/resident, say to 2 million people, that is $10 billion.
Even if 60% of that is spent on goods, won't it push up inflation ?

I think the article makes a good deal of sense. It seems clear that Wheeler has a mindset that is at odds with what is actually happening on the ground. He persists in believing that just one more cut and magically, our $ will start to fall,import prices will rise and lo and behold, inflation will appear from the conjuror's hat. The fact that other central banks are doing the same thing,doesn't seem to shake his faith in his ability to pull off the trick-eventually.
He writes that with very low rates,dividend income from equities will fall and I see no evidence for that in NZ.. I have not had a single cut in dividends from my shareholdings and indeed, many have been increasing them.

A good way to drive money and inflation into the NZ economy is to ensure we allow foreign trade and import money from overseas, that also applies to housing. Hence let foreigners buy NZ housing at top dollar and the money flowing into NZ will create jobs and inflation. For those FHB that cant afford to buy in Auckland then they should look at buying an investment property outside of Auckland. But now they cant do that due to the 40% LVR so I guess they are now totally ######...