What Orr’s abdication of duty with puny OCR rise says about where Reserve Bank Governor now sees limits of NZ Free Market Monetarism
The ramifications of Orr surrendering inflation to the market are still being digested, but it is a clear signal from the Reserve Bank Governor that NZ Free Market Monetarism alone will not and can not get the Government out of the neoliberal straightjacket both National and Labour have collectively agreed to to strap themselves into.
Orr will now refuse to burn the economy to save the economy.
Despite the enormous inflationary pressures about to rip through NZ in the wake of Orr’s capitulation, Orr is telling Government they can’t rely on him screwing the scrum any longer and they have to either borrow more for the infrastructure or raise taxes on the rich to pay for it.
Inflation softened in our last quarter because of softening oil prices caused by Biden tapping the US strategic oil reserves. OPEC responded with cuts which take effect next month on top of the 25cent fuel subsidy relief coming off meaning the deflationary item that caused cooling inflation (softening oil prices) won’t be available next quarter.
This on top of the unprecedented 100 000 new migrant workers, on top of 12.4% food inflation on top of the full impact on our horticultural industry from the storms and there is a very good chance food inflation will push past 20% before the election.
Orr risks all that to spell out it is the Government’s responsibility for all of this and they are going to either have to grow wages to compete or reign in the corporations whose price gouging is generating most of the inflation in the first place!
As Professor Wayne Hope pointed out earlier this week on The Daily Blog…
Behind this policy correspondence lies the fundamental truth of New Zealand party politics. Labour and National are both die-hard monetarists, the Reserve Bank Act is their unspoken article of faith. On this doctrine, advanced in the late 1970s, excessive public expenditure and real wage growth will increase aggregate demand and inflation levels. If central banks can adjust the money supply to increase commercial/investment bank interest rates, demand will contract, and inflation will be manageable. Unemployment rise is a necessary if unfortunate side effect.
Research from William Phillips, Paul Samuelson, Milton Friedman and others seemed to indicate a trade-off between inflation and unemployment. Fiscally responsible governments would target the former through monetary policy. Well-meaning spend-up governments would over-inflate and damage the economy. In New Zealand, Labour’s 1989 Reserve Bank Act effectively ended the debate. Both major parties concurred with the legislation. The 2021 RBNZ Act modernised operations and tweaked the legal wording but didn’t change the basic doctrine.
Aside from older macro-economic arguments, the doctrine is wrong. Inflation today does not have monetary causes and monetarist solutions cannot work. Edward Miller, economic researcher for FIRST UNION, cites a US Federal Reserve study which debunks the Phillips Curve. Organised labour’s declining bargaining power weakens the relation between unemployment and inflation. Wage-push inflation growth is just not there, so why contract the economy? In New Zealand, between 1991 and 2023, union density declined from over 50 to 20% of the workforce. Clearly, today’s stunted, uneven wage growth is not going to trigger an inflationary surge.
…exactly, this isn’t a wage generated inflation, it’s naked price gouging in a weak regulatory environment!
As Emeritus economics professor Tim Hazeldine noted:
It’s COVID inflation that was driven by a supply push from the pricing side of the market. The initial transportation logjams caused by lockdowns gave shippers—especially container shippers—the excuse to drastically hike their prices. In the confusion, many other sellers of many other products discovered that they suddenly had, as one analyst put it, ‘real pricing power’. And boy did they use it!
…this Price gouging inflation is backed up by International research…
For US economists Isabella Weber and Evan Wasner, evidence acknowledged by US and European central bankers indicates that “price setting by firms with market power drive inflation”. Giant corporations have the product portfolios, dominant market positions and revenue management systems to maintain margins and customers. With global reach, they are less dependent on any single national market and can shape prices. By contrast, small businesses cannot easily raise prices as costs go up and interest rate repayments increase. Creditworthiness and access to loans will therefore diminish.
…which is exactly what we are seeing in NZ…
Sound familiar? As Tim Hazledine would attest, supermarkets, power companies and banks are pricemakers who drive up inflation while the rest of us struggle. Most obviously, the four largest Australian banks in New Zealand collectively made over NZ$6 billion in 2022. They exploit, ruthlessly, the margins between the interest rates of wholesale money for them and the mortgage rates for captive homeowners.
…into this debate Orr has clearly drawn a line under how far the Reserve Bank Governor now sees the limits of NZ Free Market Monetarism.
I’m no longer looking for Socialism from Labour, just basic regulated capitalism and even the Independent Reserve Bank Governor seems to be communicating that to Treasury.
The message is clear.
Borrow more, push up wages, regulate the market and tax the rich!
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Won’t someone please think of the rich?
Tax the rich!
It’s the only way…
It’s just ridiculous to wank on about over regulation. Labour hardly do anything and National are going all Trump like with their bs messaging.
It seems to be forgotten Orr is also responsible to keep employment high .Cutting spending to curb inflation will coat jobs .It is a hardbalancing act.
Why did people buy houses over inflated, why could they not wait and why could they not live within their means, too many keep up with jones whanau in our country and now they are all moaning like babies.
Where does all the worry come from? Because the number of large houses being built, the number of SUV’s being purchased, holidays taken, etc, does not illustrate an economy in recession or one even nearing a recession.
A primary area of concern, in my view, is jobs for unskilled workers and indeed entry level employment positions for those who do have some qualifications but whom are often overlooked when it comes to employment because of external factors.
There is plenty of work at the bottom level but NZ workers do not want to do them . 180000 on unemployment benefit and a fishing company needs to bring in 100 workers from Vietnam and 80 from Samoa .Last year this company lost millions because of lack of workers . There is a fundemental problem and I do not know how it is fixed but until we do many people will carry on just get by instead of growing.
This will not be the last rate hike. Unless Orr knows something we don’t (which might be true?) Powell in the US will continue to raise raise as mandated by the Federal Reserve Act of 1913. Assuming that happens, which it will given inflation will persist for another year at a minimum, the lower NZD vs USD will force a rise since inflation here will spiral out of control given all the shit we import (especially oil and now petrol since Jacinda shut down our only oil refinery), i.e. all that made in China rubbish at The Warehouse and Bunnings that we build and furnish our house with. Orr is a joke. Don’t believe anything that fraud says. Rates will go higher. Much higher. 8-10% by the end of next year.
yawn – silly tokens are just a proxy for energy – everyone should just give up now and start building their own ploughs and engaging in animal husbandry.
where is the energy coming from to keep this ponzi going? you’re all just fooling yourselves. the only future is a managed decline or an abrupt stop. choose wisely. the steady state economy is coming whether you like it or not.
Choosing a Greek tragedy is no choice at all. Some say apes are now entering the stone Age. It’s going to be interesting whating thier development. I’m often consumed by how intelligent humans have to become in order for apes to break one of the filters into type one, two or three types of civilization.