Reserve Bank should hold off OCR increase

Reserve Bank governor Graeme Wheeler should put a hold on any increase in the official cash rate on Thursday, says Democrats for Social Credit Deputy Leader and Finance Spokesman, Chris Leitch today.

Given the move by the European Central Bank to drop its own key deposit rate to under zero percent, and the consequent rise in the NZ dollar as overseas investors seek higher yields, any upward move in the OCR will only serve to further damage the NZ economy.

If Mr Wheeler’s main concern is the overheated state of the Auckland property market, he should recognise by now that higher interest rates are not going to have any significant effect on that problem, which is largely generated by unfettered bank lending for mortgages rather than for business investment.

Equally the quest for lower inflation is not going to respond to higher interest rates which are in themselves a major contributor to inflation.

He is obviously bereft of any solution, so it’s past time he investigated those provided in the International Monetary Fund report of August 2012 which analysed the proposal for monetary reform advanced by a number of leading U.S. economists that became known as the Chicago Plan.

Its lead authors, Irving Fisher and Henry Simons proposed a change to greater sums of government (Reserve Bank) issued money and claimed the following advantages for this plan:

(1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money.

(2) Complete elimination of bank runs.

(3) Dramatic reduction of the (net) public debt.

(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation.

The IMF report states “By validating these claims in a rigorous, micro-founded model, we were able to establish that the advantages of the Chicago Plan go even beyond those identified by Fisher.

First, output gains are very large, approaching ten percent, due to a combination of lower real interest rates, lower distortionary tax rates, and lower monitoring costs in the banking system.

Second, the model provides a compelling answer to those who claim that giving the government the power to issue such a large stock of money would be highly inflationary. The opposite is true.

Not only does Fisher’s proposal not imply any increase in the stock of money held by the private sector, and therefore by construction no increase in nominal spending power, but furthermore it allows the government to achieve much lower steady state inflation without any risk of falling into a liquidity trap.”

Mr Wheeler should look at these more creative solutions and use the Reserve Bank he heads to provide low or no interest loans for local and central government infrastructure projects, and to stop the government borrowing $75 million each week from overseas banks.

Such action would result in stronger productive growth, significant job growth and put real money in the hands of consumers rather than credit card debt.

It’s time Mr Wheeler dragged our central bank into the 21st century and started using its capability for the benefit of all New Zealanders.

Ends

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