Fiscal Ignorance

I see that Phil Goff has just revealed the depth of his fiscal ignorance in a speech to federated farmers. I note that he is not actually saying that the Reserve Bank is a waste of time (almost certainly true) but that the policy targets should be liberalised to include a whole bunch of others. I just bask in the Thrill of Phil, once more. It seems to have escaped him that, if the Reserve Bank is having trouble managing a simple inflation target, giving them a slew of other targets (particularly ones they are unlikely to be able to effect) will just make them even less effective. This is not to say that the reserve bank cannot explore other means of controlling monetary policy, although Peter Cresswell argues cogently at NotPC that the best policy would be dissolution of the Reserve Bank. But the simple fact of the matter is that multiple targets would make the Reserve Banks task impossibly complex.

Once more it appears the Labour government is turning to the myth of inflation as a way to float one’s way out of debt. As it appears that the National government are not completely adverse to inflationary mechanisms, let me inject some common sense (sadly, quite uncommon) into the situation.

While you can indeed reduce you debt by allowing inflation to reduce the value of debt by reducing the value of the dollar, you find the there are two nasty side effects to this. The first is that, if you have not reigned in your deficit spending, it mushrooms exponentially and, at the same time, it becomes harder and more expensive to finance this debt. After all, if you have a Kiwi dollar in free fall, either no-one will lend you money, knowing the value of their loan will rapidly be eroded, or they will only be willing to lend at an exorbitant rate of interest. The second is that your assets erode at exactly the same rate as your debt, leaving your real debt position unchanged. The numbers just get bigger but the real values are the same. Just ask Robert Mugabe.

And as much as Phil would like you to believe otherwise, exporters are not really helped by inflation. While a falling dollar will make kiwi goods more competitive in the short term, the advantages are quickly consumed by rising salaries and manufacturing costs back home. Factor in the rapidly rising cost of mostly imported plant machinery and the increasing difficulty in financing it and it would appear that exporters have little, if anything, to gain.

The people most damaged by rapid inflation are those who derive their income from fixed assets. Every single pensioner in New Zealand will be much, much worse off. Even the value of your house may suffer some erosion, particularly if the affordability gap remains where it is. It is ironic that Goff is advocating a policy that will damage pensioners incomes severely so soon after complaining and whining about National not using deficit funding to fund the Cullen fund. The drop in the Cullen fund will, realistically, make no difference to the level of pensions. 10-15% inflation will swallow the value of fixed savings in a matter of a few years. I have seen this in action in South Africa, where pensioners have gone from reasonably well off to paupers in the space of five years of 15-20% inflation.

A high inflation rate is probably the most aggressive anti-savings measure you can make. Expect Kiwisaver and the Cullen fund to die a horrible death if Phil gets his way.

Of course, I’m of the opinion the Kiwisaver and the Cullen fund should die a horrible death anyway.

Just not Phil’s way – starved to death.

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