Reserve Bank/IMF meeting misses the point

A meeting sponsored by The Reserve Bank and the International Monetary Fund in Wellington this week is an ideal time to shine a light on a system that has delivered the highest house price inflation in history and left New Zealand with a half-trillion-dollar mountain of private debt.

“It’s important that commentators and the public take a sceptical look at the inflation-targeting methods the RBNZ pioneered almost 30 years ago. They are too often the source of self-congratulatory claims of success.

“But this ‘success’ doesn’t stack up on wider economic measures, nor when the inflationary impact on housing of the Bank’s methods is understood,” says Positive Money NZ National Spokesperson Don Richards.

Richards points out that the ‘inflation’ that the RBNZ talks about is too narrow and if housing-related inflation was added, it would have missed its targets by a big margin. This invalidates the belief that inflation has been kept stubbornly low.

“Following Reserve Bank lobbying in the 1990s, the sale of land and existing houses and interest costs were removed from its target inflation measure, the CPI (Consumer Price Index). Real house price inflation suddenly increased 4-fold from 1994–5 — from 1% in the decades prior, to 4% in following decades — but was ignored by the RBNZ and commentators.

“This was convenient because the so-called ‘wealth effect’ that pushes property-owning households to feel rich and borrow more has been an integral part of its strategy,” says Richards.

“That might have been fine in 1989 when the current Reserve Bank Act came into force — when ordinary, single-income families could buy a home — but its well past its use-by date after years of pushing households deeper into debt and pushing house prices beyond the reach of young working families.

The heart of the problem is our debt-based money system, says Richards.

“Under this system, the only way to get new money into a growing economy is for people to take on more debt. That’s because it’s private banks, not the government, that actually creates our electronic money that constitutes 98% of our money supply,” he says. For our money supply to grow, more people must take on debt and this is unsustainable.

Positive Money will be presenting a petition signed by thousands of Kiwis to parliament on 12 September asking parliament to inquire into giving the Reserve Bank the sole ability to issue all New Zealand money, whether notes, coins, or electronic.

Like our notes and coins, this new electronic money would be carefully matched to the needs of the real economy and introduced by spending on much-needed infrastructure and public services, not by lending to inflate house prices.

The RBNZ, like much of the economics profession, has laboured under a flawed theory. By removing land prices and the sale of existing houses from its mandate, the RBNZ has been allowed to ignore the collateral damage of inflation-targeting methods. That is overpriced houses and massive indebtedness — and instead claim success in meeting its own narrow idea of inflation, irrespective of the damage caused to achieve it.

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