INFLATION

Once again we’re hearing talk of an inevitable inflationary age ahead, thanks to the massive money-printing. I think this concern is misplaced.

It’s proponents revert to the now rightly discredited Chicago monetarist beliefs of the early 1980s. The argument then was that an excess of money in the system led to increased demand and thus inflation. That belief in turn led to the biggest blunder in our post-war history in the form of the Reserve Bank Act and its heavy-handed application.

Price rises, regardless of their reason saw a punitive interest rate response throughout the 1990s and as a consequence, a decaying economy. Our best and brightest fled, mainly to Australia.

That is not a throwaway line. In the late 1990s an Australian survey showed New Zealand-born citizens were the best educated and enjoyed the highest incomes of any ethnic group.

It was short-lived as in the early years of this century a different breed of New Zealanders flooded into Australia drawn by demand, in the form of shearers and mine-workers.

Canterbury University Press published my book “Prosperity Denied – How The Reserve Bank Harms New Zealand” in 1996.

I came under an ignorant attack at the time as having a vested interest in inflation.

Cost inflation is much easier to explain than the numerous convoluted articles and books published back in the late 1970s and 80s.  It’s simply demand exceeding supply for a commodity. The existence of demand presupposes the ability to pay.

The best weapon to combat it is an uninhibited free market to meet demand surges. Monetarists instead proposed crushing demand through soaring interest rates, rather than the more positive encouraging supply strategy.

Here’s why I don’t anticipate an inflationary consequence from our 2020 money-printing.

That money was substantially paid to employers to assist their wage bills during the lockdown. So it went to the public in exactly the same amount as pre-lockdown and they spent it in the same way as before, namely on everyday living costs.

Throughout this period agriculture enjoyed solid returns, so no unusual effect there, while the loss of foreign tourism revenues were, albeit not entirely, offset by the disappearance of Kiwi tourists’ outlays abroad.

Shortages which arose during the lockdowns were not price sensitive, notably diverse medical services such as dentistry and delayed operations.

The single commodity in which the lockdown had an inflationary effect was housing. With builders off the job the supply shortage was compounded.

So overall I believe speculation of a return to inflation days is an unnecessary concern.

16 Comments

You may find this intereting (form Bank of England analysts) ….collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.

Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Centennial Averages of Real Long-Term “Safe-Asset”† Rates From 1311-2018
% 1300s 1400s 1500s 1600s 1700s 1800s 1900s 2000s
Nominal rate 7.3 11.2 7.8 5.4 4.1 3.5 5.0 3.5
Inflation 2.2 2.1 1.7 0.8 0.6 0.0 3.1 2.2
Real rate 5.1 9.1 6.1 4.6 3.5 3.4 2.0 1.3
*Real rates take inflation into account, and are calculated as follows: nominal rate – inflation = real rate.
†Safe assets are issued from global financial powers

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%…..According to the report, another trend has coincided with falling interest rates: declining bond yields.

Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.

The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.

    The 1900 are a bit skewed as the Worlds Major Economies shifted to war twice, then a series of oil shocks etc

    Interesting trend, and thanks for this information.

    It suggests real growth is becoming harder to deliver, but this was always going to be the case on a planet with finite resources.

    The finance system has been a rort for a long time, and the inflation reported has been nothing more than a subset for more lies; and nothing more than a means to aid and abet the transfer of public assets to the global elite.

    Include asset prices in the inflation rate, and there would be riots on the street until employers and governments increased wages.

Asset price inflation?

    Sir Bob is spot on about free markets having solved the problem of monetary expansion inflating the prices of everything. It is about free trade, technology, and transport efficiency making the resources of the planet one huge market in which no-one has powers to extract monopoly rent, as was the norm back when most resources in a local economy, were local, and those resources that came from further away, could often be monopolized due to transport costs and regulations.

    But Sir Bob needs to understand that housing can act the same way, and did so as a norm for a few decades in the 20th century; there are still several dozen cities in the USA where the median multiple house price is 3 times household income, which was the norm before conceited central planners working for councils started rationing the supply of land. Prior to the automobile, all housing was “rent-extractive”, which meant that people could be gouged the maximum they could stand to pay, and urban land prices reflected this. Then the automobile rendered potential land supply superabundant, and the price of urban land became “differential”, based on the price of superabundant rural land, plus costs of development to urban use, plus a modest profit margin for the developers who obtained exurban sites for new subdivisions at close to true rural value.

    This is exactly the same process, as happened in most goods, where the resources required became “superabundant” and no resource owner extracted economic rent according to what people could stand to pay for the finished product. Basic foodstuffs once cost half of household income, and the windfall profits fell to the owners of the land that produced it. Urban planning fads have simply put urban property back in the economic dark ages, and housing conditions can be expected to converge back towards the Victorian era, with households commonly paying well over half their income for a roof over their heads, of ever smaller size and ever lower quality.

    Endlessly expanding money supply will of course continue to feed into this cycle. Maybe the time will come when people are getting paid to borrow (ie negative interest rates) 30 times their income, and never expected to pay the actual mortgage off in their lifetime. Meanwhile it is a question what damage the incentives to investment patterns will have done for the real economy. Britain was the first country to adopt planning that rationed urban land supply, with the consequences of urban land prices a few decades later that were tens or hundreds of times higher than other first world cities, less floor space per person than any other first world country, and a “productivity gap” that could not be explained by anything other than the distortions to investment patterns indicated by the ridiculous urban land prices. Like gold is largely speculative and the uses of it are constrained by the price set by speculation, urban land under these “rigged market” conditions becomes a speculative commodity and its use for actual housing is progressively eroded. Britain’s “rate of replacement” of housing is as low as “once in 1000 years”, when the norm in most countries until they adopted the same policies, was around 50 to 70 years.

    (Arthur) Grimes and Aitken in a 2010 paper on the failures of urban-economic computer modelling, made one conclusion that “all the profit potential from redevelopment can be impounded in rising site prices”, and no computer model was representing this; hence conceited urban planners predictions about housing supply and prices being made a nonsense of every time. If Sir Bob is clear about markets versus conceited central planning, he should appreciate that housing in our time is one of the most egregious examples in economic history.

I see inflationary forces ahead..
Dont u think cost inflation is a little more complex than simply demand exceeding supply.?
eg.. Labours climate change policy is , supposedly, going to “cost” 1% of gdp/yr.
I have no doubt that Govt will mitigate the economic impact of this with deficit spending, in hand with reserve bank money printing.

The secular trend in lower interest rates might be close to an end…( at least as a deflationary force ).
Rising interest rates will impose rising costs , in what is basically a Debt burdened world…
etc..
Supply chain inflation…. ? Are the deflationary forces of Globalization over. ?

    The result of the Government’s climate panic will be less produced with more effort. That will make the nation poorer whatever the RB does with the money supply.

Being a man of letters and learning that I am I’ve been of late running the line of pending hyper inflation but now, alas, I’m now a convert. A convert to the Johnston Street school of economics. Begin an RE commercial guy I can easily follow the rational – not many words needed to explain how things work. Like most academics they like to write up a storm to explain the simple. The questions I now have are: what is hyper inflation and what’s the causes of economic surges. (Dam good read. Pardon the tenor of my reply).

Significant sums of money were claimed that didn’t go to ordinary Kiwi’s, ‘who spent it’.Rather, It went to big companies and they kept it.. Some is being clawed back or given back but not all , Imagine that !
Also the ridiculous amount of printed money ‘printed ‘ – $200 Billion Dollars is ; Arderns favorite word, ‘unprecedented”. Its also a destruction of our Economy’s prior good health.

I’m predicting disinflation in the price of Nissan ” Leafs ” as a misguided woke government subsidises them at the taxpayers’ expense . . in an attempt to get city folk out of their Fendalton Tractors … to commute the few city roads that haven’t been stuffed up by bus lanes , cycleways , and concrete planter boxes …

I agree. Inflation is unlikely to return to the 1970 levels, as that was principally caused by the oil shocks of the time. Inflationary pressures are low as the governments printing of money was & is principally to keep peoples income at a reasonable percentage of pre-Covid lockdown. This is hardly likely to induce the devaluation of the NZ Dollar. I also agree with SRJ about the damage done to NZ by focussing purely on inflation-in a country of NZ size-all that happens is that the traditional boom/bust cycles of an economy still see the busts but never see the booms. Result? In boom times everyone heads overseas. We would have been far better to focus on R&D.

As long a property prices are excluded from inflation assessment, we can carry on pretending we don’t have an inflation problem.

Further to my earlier comment-There are no winners to inflation. Property owners may see a temporary brief safeguard, but inflation makes a country less wealthy-and Property prices are always driven by supply and demand.
Diminsh the wealth of a country and its property is in less demand-ergo wealth is decreased. Its the old cliche about a rising tide lifts all boats. A wealthy country has higher demand for property-this increases the value of said property.

Yes the massive increase in global liquidity in recent years through central bank actions appears not to have had any impact on consumer prices which supports your view that the monetarist view of inflation is discredited. However it’s clear that increased liquidity has had a huge impact on asset prices, notably for housing and the stock markets.

The other aspect of housing in NZ that should be mentioned is the impact of immigration. For some odd reason this seems to be ignored by most commentators. Since 2013 the net migration gain (including returning Kiwis) to NZ has been in excess of 500,000. This is 10% of our population. It’s the equivalent to the population of greater Wellington. Good grief, no wonder our infrastructure is groaning, and house prices have rocketed!

    The biggest elephant in the room is the profits extracted offshore. $20 billion per annum at last count; the equivalent size of 40 fonterras, which seems disproportionately high on a country turnover (GDP) of less than $300 billion.

    Thats 7.5% net return on turnover, which is high for any ones business, and lets remember the $20 billion doesnt include locallly owned business profit. Clearly NZ is getting fleeced by offshore owners and no one is talking or doing anything about it. Makes most other economic indicators; including inflation, irrelevant.

    Its about time we started talking about this, dont you think?

Good article champ, on a recent project I noticed needing to book 2 months in advance to get trades people out. I wonder how long that back log will last…

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