Campaign Bollard

[Edinburgh]

Today's news is that the current account deficit is at record levels. The economists say this makes a rate increase in Dec even more likely. I don't get it.

I understand that Bollard thinks that increasing rates are the only way to control consumer spending and therefore inflation, but I don't agree.

Why are we importing more than we earn? Because the dollar is high making our imports cheap and our exports expensive. Why is our dollar high and going higher? Because Bollard keeps increasing interest rates.

Solution? Decrease the interest rates. Dollar falls, imports more expensive, exports can be sold cheaper to earn the same dollars, hey presto - no more record current account deficit.

If we had mortgage payments and rent in the CPI, then this would further reduce inflation.

Of course, the expectation would be that with this extra cash, we would just spend it. Solution? Compulsory saving schemes to mop up exactly what we save from reduced interest rates (let the economists work it out).

We hear all this talk about additional intervention to control inflation, but this is all negative intervention, holding us back. This is positive. Individuals have savings for the future, NZ industry has pension funds investing money in NZ.

What's my motivation? Not the obvious one. I actually have only 2 rentals, both on fixed mortgages. But I have invested in some new building and I am fearful that Bollard will tip the economy into recession. I can live with the interest rates as they are, but not with my houses sitting for 6 months and then selling for a pittance.

And I care about the country - I don't understand why we have to stop the economy growing when, with a small economy growth is actually what we need. Who want to wait 3 years for an operation or have a begging letter from your child's school (as I did this week) or poor transport infrastructure or power shortages next winter, or all our best & brightest leaving for Australia, or a workforce 25% less productive than Australia's, etc, etc. - I don't.

It was probably a waste of time, but I wrote to Bollard to tell him to stop relying on historical data (the property market is already slow in the leading areas) and think of more positive ways of tackling inflation. I urge you all to do the same.

By the way, I also support a huge drop in the corporate tax rate - this too is essential for the future of our economy. Just ask the IRD.

[Gatekeeper]

Surely those who are in debt should pay the price of borrowing from overseas. Why punish those that have already saved and invested their own hard earned money. Pensioners for instance have been doing it hard for years now with their nesteggs, whilst debt has made people rich and put first homes out of reach of the average punter.

If our dollar hadn't gone so high we would be paying through the nose for oil imports and the like already, boosting inflation, and hence the cash rate.

Most PI's have been banking on inflation in house prices, but don't want to pay the price of inflation at the end of it. That's the property cycle. Don't get caught at the end of it, when the equity disappears. That's the gamble part.

All the best.

PS: I don't like anything "Compulsory", do you you really want the Government running your life.

[fudosan]

In his book "How the Reserve Bank Harms New Zealand" (1996), Bob Jones is strongly against the reserve bank's using interest rate to control inflation. The losers under this policy are the exporters and the winners foreign money lenders and importers. Free market, he stated, will eventually bring price stability through supply & demand mechanism, so there is no need for inflation control.

[roseneath_rat]

Discretionary income is a larger cause of current account blow-out than high exchange rates. We can complain about the Reserve Bank increasing interest rates, but moaning to Bollard will fall on deaf ears. Under the mandate from the government the RBNZ only two tools:
1. Changing interest rates
2. Talking about changing interest rates

But government intervention?? No thanks.

It is actually the retail banks that have helped to perpetuate the spiral of spending, partly through a large disparity in pricing between floating & fixed mortgages. It will just make the crunch hurt more when all those fixed rate specials come off.

[Chemill]

Something that amuses me: The country's economy is influenced by hundred of factors, through a whole variety of market sectors. But what is the control for all of this? Just the one and only Interest rates.

I can just imagine a Mr. Bollard at his desk with two buttons: Green for go and red for stop.

But to be serious: I always thought that one of the key principles in economic theory is that the market place is always in balance. While imbalances do occur, eventually the market sorts them out. Why bother tinkering with it? -it's kind of an automatic process. Just keep your hands away from the green and red buttons.

[cube]

The problem with market forces is that, at a macro-economic level, they take took long to act, and sometime over-compensate. That is why you get massive swings from 15% inflation to recession. The RBNZ is tasked with planning to make sure, first and foremost, that the economy doesn't go in to recession.

If there is one thing that any business person wants, it is certainty - certainty that the exchange rate will be substantially unchanged over the medioum term. Certainty that taking out a 15 year loan for new plant isnt' going to lead to being cash strapped when interest rates go up to 15 or 20% (its not that long ago, people!).

The market in illiquid assets (such as housing) is inefficient (otherwise there wouldn't be a predicatable 7 year (ish) cycle) - if it was efficient, then house prices would be read out on the news in the same way that the stock market prices are.

Cullen is already taking several $billion out of the economy for future pension provision. No doubt, the fund will be raided in the future to shore up some failing private, but large, enterprise or other, but in the meantime, moving money from interest payments to more compulsory saving doesn't seem like good sense to me.

cube