OMICRON HAS ARRIVED and, not unreasonably, its spread will monopolise the attention of our news media for weeks to come. But this latest variant of Covid-19 is very far from the only challenge facing New Zealanders. A highly disruptive economic phenomenon, not seen in this country for a whole generation, is making a disconcerting reappearance. An inflation rate significantly higher than the 1-2 percent per annum tolerated by the Reserve Bank since the late 1980s is threatening to further complicate an already fiendishly complex socio-economic equation.
The eradication of excessive inflation was the most important short-term objective of the neoliberal revolution. Squeezing constant price rises out of the system would be an achievement consumers were bound to notice. Indeed, the restoration of price stability would be presented – and largely accepted – as justification for the many other, often wrenching, upheavals of the reform period.
For the neoliberals, knocking inflation for six came with added benefits. At a stroke, the key justification for cost-of-living adjustments to wage rates would be removed. Back in the days when most wage-workers belonged to a trade union, rapid rises in the cost of goods and services was compensated for with corresponding rises in the cost of labour. This was the “wage-price spiral”, which most economists characterised as the fundamental explanation for inflation becoming economically “entrenched”. Their favourite metaphor was of a dog chasing its own tail.
It was absolutely crucial, they argued, not only to eliminate high inflation, but also to remove high “inflationary expectations” from the minds of wage- and salary-earners. So long as workers believed that prices were bound to rise over the period of their union-negotiated wage agreement, they would take care not only to secure an increase to cover the price rises that had already occurred, but also to secure an additional margin sufficient to cover future increases. Should the employers be prevailed upon to meet their employees’ wage demands, the typical response was to recover their costs by raising prices. Upwards and upwards inflation spiralled, to the general frustration of the whole population.
Particularly aggrieved were those on fixed incomes: transfer payments whose value, in almost every case, was progressively whittled away by excessive inflation rates. Even if adjusted to accommodate historic inflation, pensions and benefits were almost never adjusted to meet future increases in the cost of living. The inevitable loss of purchasing power meant that those on fixed incomes became poorer and poorer.
Not everybody living under high inflation was unhappy. People who borrowed heavily to purchase a house, for example, watched in glee as what had seemed a colossal mortgage continued to shrink, in a relative sense, until, after a few years of high inflation, it was reduced to a mere bagatelle. Thanks to the steady increases in their salaries, paying off the bank got easier and easier. What was not to like?
Plenty, if you were a coupon-clipping investor. If the rate of inflation exceeded the fixed rate of interest on a long-term investment, then your purchasing power was bound to suffer. The sum agreed for making your funds available to the borrower may have seemed generous when originally negotiated, but its value, in real terms, upon maturation could be much less so. Small wonder that the neoliberal economists’ recommended solution for excessive inflation – a sharp increase in the price of money – i.e. high interest rates – could always count on the vociferous support of the rentier class.
Jacking up interest rates, suddenly and substantially, certainly reduces inflation, but only at the deliberately incurred cost of crashing the economy.
Without easy access to credit, marginal businesses falter and fail. Workers are laid off in their thousands, and the consequent savage reduction in overall purchasing power precipitates further waves of business failures and lay-offs. With demand for goods and services plummeting, any attempt to preserve a business’s income-stream by raising prices becomes commercially suicidal.
With unemployment rising steadily (along with the supply of labour) the ability of workers’ unions to extract pay rises from their bosses falls away to nothing. Increasingly, the individual worker’s purchasing power is maintained by his taking on more and more debt. An indebted worker is a quiescent worker, so the wage-price spiral ceases as abruptly as the effectiveness of the unions which set it in motion. Such inflation as remains in the system now works against the income share of the workforce, who find themselves working longer and harder for what is, in real (i.e. inflation-adjusted) terms – less.
Right now, New Zealand is at the pre-crashing the economy stage of the battle against inflation. But, with annual inflation nudging 6 percent, a level New Zealand has not seen for more than a decade, the demands of the neoliberal economists for a series of quite sharp interest rate rises are becoming ever more strident. They are deeply concerned that the combination of supply-chain interruptions raising demand (and, hence, prices) and a serious labour shortage allowing workers to bid-up their wages, are settling inflationary expectations into the nation’s consciousness.
There is a great deal the neoliberal establishment will risk to eradicate those expectations – up to and including deliberately throwing the New Zealand economy into recession. As always, that will be very bad news for most of us, but quite encouraging news for some.
Any significant rise in interest rates will see thousands of mortgage holders default on their loans and lose their homes. The resulting surge in mortgagee sales, by expanding the supply of properties on the market, will precipitate a sharp fall in house prices across New Zealand.
While that is not an outcome likely to recommend itself to older home-owners accustomed to seeing the value of their property go up and up – not down and down – there will be many younger New Zealanders who are willing to admit, quietly and privately: “This anti-inflationary thing – it’s not so bad”.
Very well put Chris.
Mind you, even paying for a cheap house would he a nightmare with high interest rates and low wages.
That is why inflation must be kept high, so wages and be high and people can find jobs.
Low inflation leads to poverty and low wages. Simple.
Yes millsy, people forget; we were paying over 20% interest on our first home mortgage!
The transitory benefits from inflation to a few are nothing to the wholesale destruction. As the time value of money increases interests rates will naturally rise regardless of central bank actions, pension funds and savings destroyed and speculative safe havens become attractive
Through out the vast majority of history there has hardly ever been inflation (war aside) and ‘they’ prospered well.
The only advantage of inflation is it allows the uber elites to make money by doing nothing (of use to mankind).
Inflation is dilution of your savings and salary. And it’s what keeps us all debt slaves. Take away the illusionary wealth in houses and the share market and see how wealthy you really are.
House price rises are invariable a reaction to currency dilution, i.e. future inflation.
There is a 95+% correlation between the FED’s ‘money’ printing (it’s computerised digits invariably now !) and the stock market and house prices.
i.e. they are ONLY going up due to dilution of the quality of the currency (p.s. it’s NOT money).
The tax dodging rentier class will be circling the wagons ever ready to make a killing from the cheap housing that will be available to them at heavy discount. Nothing changes.
In the short term during a continuing pandemic the Govt. needs to introduce another “transfer” payment, via IRD not MSD (that bit is important) of say several hundred dollars per week to all citizens–call it a Basic Income trial or whatever. The other “leg” is Rent Freeze and Rent Control and revisiting CGT.
This would support some purchasing ability for all in the face of the massive shitstorm approaching.
This is the time for the new gens to get politically organised and for a reboot of serious leftwing politics linked to direct action. The alternative is an NZ twist on MAGA where some dickhead empathises with the exploited, gains political power and then does exactly nothing for said exploited.
6% is the official *government* measure of inflation. A government that has been lying to us for decades. If you want to really know what inflation is look at real assets, e.g. houses. Houses still do what houses did. The New Zealand population has not doubled in 5 years, but house prices have. This pattern is repeated in all other real assets from stocks to gold to chairs.
Please stop repeating the lie. Inflation has been over 10% for decades and is closer to 30% right now.
We don’t have a housing crisis – we have a crisis of the rule of law, people’s wealth is being stolen and redistributed to the ruling classes.
Inflation is (invariably) caused by two things, and neither have to do with the working class trying to ‘play catch up’ with the effects of inflation. That is just a useful mantra for the ‘too dumb’ to understand and let the crooks off the hook, by pointing the finger else where.
1) Creating money out of thin air. This used to be a Monarch/Govt ‘thing’ and partly explains why taxes (outside of wars) usually didn’t exist for the vast majority. i.e. the MASSIVE profits gained from this exercise ‘went to the state’.
2) Loss of confidence in the currency (it is NOT money; only Gold and Silver are real money, every thing else is credit. Mr Morgans quote I believe). People then spend as they expect prices to keep rising. Known as velocity of money.
So stupidly ‘we’ gave the ‘uber elites’ the power to create ‘money’ out of thin air and then charge interest; a double wammy. Great work if you can be the one sitting on your arse creating ‘money’. Look at creation of F.E.D 1913, or the book Jeckyl island. Uk did it with the B.O.E BUT there was an expanding empire so a lot of the negatives were off set by new wealthy being creating ‘soon after’. So it could be argued this was just ‘good borrowing’.
That then creates ‘too much ‘money’ in the system for no increase in goods (and services) so more money chases the same products, eventually causes price rises.
So the poor are always playing catch up to price rises caused by and purely for the benefit of the ‘uber elites’.
We’re then feed the B.S that wage rises are the crime, so pressure is put on the poor to tighten their belts so the uber elites can sit on their ever more comfortable arses.
Look up the Cantillion effect for how the normal rich and middle class do OK out of it also, but to a lesser degree. ‘Crumbs off the table’ so to speak.
Kevin
This isnt wrong as you stated; its additional to the other reasons you give.
Inflation is (invariably) caused by two things, and neither have to do with the working class trying to ‘play catch up’ with the effects of inflation. That is just a useful mantra for the ‘too dumb’ to understand and let the crooks off the hook, by pointing the finger else where.
101 economics in a nutshell….and your proposed solution is what exactly?
We’ve already listened to the megaphones of ACT Party’s lies.
Asset sales, GST, tax cuts for the wealthy, get rid of unproductive New Zealanders by having voluntary euthanasia. Oh did I mention the other ACT megaphoned gems that Government should get out of the housing market and let the ‘market do it better’; get out of hospitals and schools by private hospitals and education vouchers and public-private partnerships.
Next, no doubt, as weel as their category of asset theft, ACT will suggest 20% personal tax, 20% business tax and GST at 20%.
These ACT recipes for economic success (sic.)will ‘stimulate the economy’ and allow money to “trickle-down” to the ‘needy and the poor’.
You can take your ACT ‘economic roadways to prosperity and trickle-down wealth’ and put the promises, and the megaphones where the sun doesn’t shine!
I’ll elaborate on that last conundrum of darkness – where your social responsibility and soul used to live when you used to be humans, instead of mouthpieces for neoliberal claptrap and lies.
Interesting trying to pretend to be looking at the state of things and why, but see voluntary euthanasia as simply an economic matter. In truth, are you an economist?
Interesting, that I gave the readers here a litany of the ACT manifesto of shame and some people (well you really) seem to only focus on one that you think applies to you. Is it because you are grey Mr, Ms, Mrs, Dr Warbler?
One of the great mysteries of life, is that people can be myopic, or selective in their focus. It’s a mystery similar to where all the spare socks and biros go in the world, and, why when you drop a piece of toast, it always lands butter/jammy side down.
If it helps you, just ignore the ‘voluntary euthanasia’ solution to old age and terminal illness.
P.S. Interest rate rises is a scam. It really only works when you have a functioning local economy that makes things. It’s just a way to shake already struggling home owners out of real assets and transfer the wealth to the ruling classes – having saddled the those people with huge debts that they still have to pay off regardless of whether they are living in the houses or not. And if it is really bad it destroys the economy and depresses wages so the level where buying a house is still needlessly expensive.
The alternative, in NZ at least, is spending the money on infrastructure instead of giving it to banks, but I doubt Jacinda is aloud to do that even if she wanted to.
In reality, the true rate of inflation for most NZers has been much higher than the official rate of inflation for some time. Significant rises in the cost of food, fuel and electricity never seem to be reflected in the official rate in the same way they are on the bills that arrive very month. The inflation of the seventies and eighties was caused by the twin effects of the oil shocks from the Opec embargoes and the move away from fixed exchange rates caused by the US need to pay for the Vietnam war. Wage rises were a response to these, not the cause of them. Since then the central banks need to stamp on the brakes at the first sign of good economic growth has seen wages unable to keep up with the escalating cost of living leading to the falling living standards and social depravation we have seen in the west. There was some hope when the Reserve Bank act was reviewed, but that was tinkering around the edges to avoid scaring the horses. The current inflation is a supply issue not a demand issue. Cranking down on the demand will simply fuel a recession without fixing the problem and driving many businesses and families who survived covid thus far, under.
‘6% Inflation’ ???
The price of Brent crude has risen around 60% over the past year, i.e. from around $56 to around $86 [US dollars]. 30/50 = 60%.
https://oilprice.com/oil-price-charts/46
And the Kiwi has fallen against the greenback from low the 70 cent range to current 67 cents.
So the actual price increase for internationally-traded oil is well over 60%.
Since the entire NZ economy is predicated on using imported motor fuels made from Brent (or other crudes that have risen similarly), and since oil is a proxy for everything economic in this petroleum-based society. it naturally follows that there will be the biggest financial-economic implosion in history very soon.
Needless to say, the vast majority of people, utterly dependent on irrational confidence for survival, say: “You’re too gloomy. That will never happen.” Even as it happens right under their noses.
Undoubtedly, the LINO government’s response to the dire predicament we are now in, as a consequence of decades of denial of reality, will be a rallying call, heralded by: “Build more roads,” which has been one of the the stock answers to practically everything for the past several decades.
Yes. I agree. The “Build more roads” campaign has served both Labour led and National led Governments very well but the tires are now treading too thin. Labour branched out and promised 100,000 new State houses but failed to deliver. They came up with the idea that charities contribute to these 100,000 new house builds at a time when not only government funding to our prime charities was being scaled back, but also private donations were diminished due to successive disasters such as the 2010/2011 Christchurch earthquakes, then the Covid-19 pandemic; there’d also been a global financial meltdown in 2007 which also contributed towards people and charities having less funds available.
Each time we get a change of government, they borrow more money, and then the country gets further into debt. I understand that there have been natural disasters, I understand that funds were needed for repairing our roads and building new schools, but for goodness sake, there was money allocated towards the building of 100,000 new State homes over the course of ten years and, now, several years down the line, there are nowhere near 100,000 new State houses to show for it!!
What ever the causes for inflation,
(personally I think it is linked to the price of petrol),
The Reserve Bank has failed in the one job it has to do.
There is an underlying factor to the wage price spiral that Social Credit identified a long time ago.Back when the money supply issued as debt by the banks was at least controlled in it’s overall volume by the Reserve Ratio imposed by the Reserve bank.
Even back then while loans were repaid ultimately by the recycling of someone else’s debt somewhere in the system , so that a new loan to one participant repaid and thus cancelled the money created in the first. Keeping the overall money supply either constant or increasing at a managed rate reflecting increases in the overall size of the economy.
What was always left out of this equation was where the money was to come from to make the interest payments. There is no mechanism in the banking system for this factor, so the result overall has always been that debt must always be rising in the economy as a proportion of the money supply. interest rates increases only increase the rate at which unpayable debt increases. So now 70 odd years after the reset of Bretton Woods , and the abandonment of any control of how much debt banks should issue, debt has now completely overwhelmed the money supply. So that is to say that all the money in the world cannot discharge even a tiny fraction of the world’s debt. Hence though it is not acknowledged , the need for now unending QE , the continuation of must lead to an endless spiral of inflation which as the created money begins to leak out of the corporate/banking world as it is now doing; Ending the QE or normalising interest rates will cause an immediate complete collapse . The collapse will take longer via the inflation route but it will be just as certain.
D J S
A perfect storm is brewing for winter:
Increasing interest rates
Supply chain disruptions; and
Omnishambles
No real ability for further quantitative easing
Buckle up
Join a union, demand COLA’s
Wait a minute, you mean to say that printing 10’s of billions of dollars out of thin air increased inflation (and that is especially affecting the most vulnerable negatively and making all the mega-rich mega-richer)? But, but, but I thought Keynesian Economics (aka MMT) with massive handouts to people not working is what we all wanted and needed to save us from the evil capitalisms!? I thought money was “free”!
If you look at some of the people who lost their homes in the 1980’s due to the high interest rates, many of them are still renting today and have never been able to buy another home of their own.
This is why direct government intervention is needed to assist in curbing high inflation and high interest rates. Mechanisms such as rent controls and also being able to reduce taxes such as rates on properties, GST, and Excise Taxation by looking at alternative methods of tax like a Mansion Tax, a comprehensive Inheritance Tax, a Financial Transactions Tax.
Otherwise, we’re looking at five dollar a litre petrol in 2024 and fifty dollars for a lamb roast. These are simply hypothetical examples I know, but it is the reality of a life they we’re looking at if changed are not made in the taxation and pricing of goods areas.
Your are thoughtful Chris. The needle had got stuck in the groove, reproducing the same result whatever the plaint of the listeners in general. Covid has shaken up the kaleidoscope, altering the settings, whether liked or not. We have to work to rearrange them in a more satisfactory way going forward, before the sound of loud, unhappy cries becomes the new version of the old accepted cacophony.
Phony inflation figures generated from a phony economy. But at least I can understand why certain figures aren’t calculated in ‘official’ inflation numbers, given the excuse the moneyed class needs to be able to keep the working class in line.
Since yesterday:
13:46 pm CDT 25/01/2022
Brent Crude(March Contract)
87.86 +1.84%
https://oilprice.com/oil-price-charts/46
Obviously the price of crude oil cannot continue to rise at an annual rate of 700%. Market manipulation and demand destruction will undoubtedly cause a fall in international oil prices at some stage, which will be followed by another series of rises, as the value of fiat currencies plummets.
Opportunists are not slow to promote electric cars, despite the fact that the price of lithium ore needed for batteries has skyrocketed over the past few months, and despite the fact that NZ has been importing dirty Indonesian coal to keep the electricity grid functioning.
Undoubtedly, mealy-mouthed politicians will pretend they have everything under control and that we are on the cusp of “a better, brighter future.”
mealy-mouthed
ADJECTIVE
afraid to speak frankly or straightforwardly.
Robbery by stealth:
The Kiwi dollar 66.7 US cents.
Given inflation around the world is increasing one can only assume it is jacindas and labour’s fault also.
We are expecting the price of petrol to reach $3.00 a litre or higher by the end of this year. What will it be by the end of next year if government intervention does not take place? Around $4.00 a litre or higher, I estimate.
The price of food has increased. Takeaways, like KFC, McDonald’s, etc, and even items like fish and chips. This is partly to do with the increase in the minimum wage; and also partly to do with inflation, as the higher cost of products, say fish, mayonnaise, water, flavorings, potatoes in some regions, cheese, make it necessary for these retailers
to implement price hikes. The supermarkets, as retailers, are following this same pattern so everyday household goods are becoming more expensive as well. Once again, government intervention is needed.
The triple threat here, to the pay packet of the average New Zealand family, is high rent. Rent goes up to meet demands on property rates, which frequently go up in price. Most New Zealand Councils are overloaded with debt and a lot of their assets have stagnated in value; therefore, any government intervention in the form of rent controls should be taken on only in conjunction with Central Government working alongside the respective Councils to alleviate their debt obligations from a long term objective.
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