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Call for new recipe for economic pie

ADVANCE New Zealand

A new design for our economic future


Date: Thursday, 31 July 2008

Advance New Zealand calls for new recipe for economic pie

An NZ Herald article today by Brian Fallow ‘Bollard defends monetary policy’ should be renamed ‘Bollard defends repeated failure’.

Bollard is stuck with the same mechanism to ‘control’ inflation as was his predecessor Don Brash e.g. manipulating interest rates regardless of the inflation source. Unfortunately the monetarist associated inflation targeting mechanism is, as described by Nobel Prize economist Joe Stiglitz, “a crude recipe based on little economic theory or empirical evidence”.

Inflation targeting ignores the reality that in most countries that use the single lever of interest rates their inflation is largely imported, as in New Zealand.

The Reserve Bank would have to lever interest rates to such a level to dampen aggregate demand that the economy would slow to a crawl and unemployment would be rife. As Professor Stiglitz points out “the cure would be worse than the disease”.

J M Keynes proposed over 50 years ago that global trade should have its own unit of currency and operate separate to but in harmony with national economies. That is a proposal which should be revisited because there is nothing surer than that the present debt based debacle will only lead to ever greater disparities amongst global communities and thus generate increasing conflict between them. The now collapsed Doha round for example. As Australian economist Professor Steve Ken said in June this year; “Debt is the financial systems carbon dioxide”.

The heating up of economies around the globe is clear evidence that the volume of interest bearing debt being created, mainly to finance speculative purchases, is adversely impacting on the real economy and Mr Bollard pulling on a single lever at the Reserve Bank is not going put out the fires of debt driven inflation.

The problem of inflation stems from the historic mechanism which injects virtually all money into the economy as interest bearing debt. That mechanism is inherently inflationary and until it is addressed the adverse outcomes will continue to impact on production, distribution and consumption and no amount of fiddling with interest rates will see the problem resolved.

Real reform of our primary money mechanism is urgently needed.


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