Sludge Report #63 – More Steak Less Vacillation
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More Steak Less Vacillation Required
It is time to put our dear Dr Don on a steak only diet.
In C.D. Sludge’s recent experience Reserve Bank Governor Dr Don Brash has twice now announced weak-kneed 25 point basis cut in interest rates, only hours after the world’s most powerful private capitalist Dr Alan Greenspan has announced rate cuts twice as big for United States borrowers.
No wonder Alasdair Thompson of the Northern Employers and Manufacturers association is pissed.
Does anyone seriously believe that Kiwi borrowers need to be constrained by interest rates 50% higher than their yankee brethren?
But then perhaps American’s are entitled to enjoy 5% growth rates from time to time while Kiwis should make do with their good 2.5% years.
Explaining his decision to wimp out yet again on lifting a little of the burden of debt slavery from the backs of Kiwi mums and dads, Dr Don says, “it is not yet by any means clear that growth in our main trading partners will continue to be weak next year, the time most relevant to what we do with monetary policy today.”
Hold on a minute. If cutting interest rates in New Zealand now will only affect the economy next year, then how come when Alan Greenspan cuts interest rates aggressively in the US commentators sprout up all over CNN and the BBC predicting a recovery in the US economy this year?
Fortunately here in the Reserve Bank lockup there are plenty of resident gnomes who can be asked such curly questions.
“So how come?” asks Sludge.
“Well that’s because consensus commentators in the US are predicting a V shaped recovery, but that doesn’t mean that Alan Greenspan is.”
“Well in that case,” replies Sludge,”how come Dr Don doesn’t follow Alan Greenspan’s lead and ease interest rates on the basis that the US is headed for an L shaped recovery?”
“Because we don’t know that will happen, there might be a V shaped recovery afterall.”
Sludge detects a circular argument here and so changes tack.
“What evidence is there of inflationary pressures in the NZ economy, in light of the fact that NZ households are presently experiencing declining real incomes? And the fact that the New Zealand economy is hardly growing at all at present.”
“Well there is 1.5% growth expected in the first half of this calendar year. And then there is the booming export sector,” “ replies the resident gnome, “back in 1993 when we had an export recovery this later flowed through to house price inflation in Auckland. It is a credible scenario that this could happen again.”
The gnome went on to say that the Reserve Bank needs to be cautious to prevent the same happening again.
(Something, Sludge forgot to mention it at this juncture in the conversation with the Gnome, but has remembered since: back in 1993 we had an American economy on the way up, not on the way down.”
But, replied Sludge, “back then we also had strong money supply growth over 10%. Now we have historically weak money supply growth between 3% and 5%. Isn’t the truth that there is very little room for inflation here as long as Kiwi consumers aren’t borrowing, as they are now.
Shortly after this the conversation deteriorated a little. Sludge, on the verge of descending into a diatribe about monetarism, elected instead to just retort to the Gnome’s dismissive attitude to such analysis with a remark about the Gnome’s parentage and went back to writing this rant.
The main point of all this, is that today’s decision is likely to be very poorly received, and for good reason.
In a world seemingly teetering on the edge of a recession Dr Don Brash’s decision to hold interest rates 50% higher than those of the US will be controversial to say the least.
Australia’s central bank has been aggressively cutting rates recently. Last week even the ultra-conservative European Central Bank cut rates suddenly, partly in response to a decline in industrial output.
While there are a few optimistic bulls out there who see a rosy future for the international economy in the medium term, they do not appear, on the face of it, to count any Central Bankers among their number.
With the exception, it seems, of our own dear old Dr Don Brash.
On the bottom line what Dr Brash has decided today is that it is prudent to keep at least one ear open listening to the optimists about the US and World economic prospects, and to not to cut interest rates at this time. This will avoid risking exciting NZers into borrowing against their houses and spending the cash, thereby driving up inflation.
If the effect of this is to keep New Zealand cash starved with money supply growing at less than replacement levels (i.e. maintaining a scenario in which insufficient new cash is entering the economy even to pay the interest on what we already owe to foreigners, let alone make the pie higher) then that is a price worth paying.
Of course Dr Brash and his fellow Gnomes would reject entirely this mode of argument simply on the grounds that as far as they are concerned money supply has nothing to do with anything.
In the end, of course, time will tell.