Is New Zealand about to descend into the crazy, price-controlled, inflationary days of the1970s?
Or do we now live in a magic world where money is free and debt doesn’t matter?
The answer to both questions is: no.
There’s two sides to every debate. One of them is usually wrong.
But the more polarised a debate becomes, the more likely it is that both sides are wrong.
Take the endless left/right battle.
At the extreme left we get Soviet Russia and with its terrible state-controlled consumer goods.
The commies might have won the race to space but they couldn’t design a decent pair of jeans.
On the far-right we eventually get to the zero-state, warlord model.
A world of unfettered libertarianism sounds fun – until you realise freedom is just another word for a machine-gun-mounted jeep and a gang of well-drilled teenage boy-soldiers.
In the world of economics there is a very important debate about inflation right now – which is also polarising into absurdism.
On the right there seems to be a very worried bunch who think social measures to address rising inequality will coincide with loose fiscal and monetary policy to plunge us back into the darkest days of Muldoonism.
These people seem to have missed that fact that we still run an open, globalised, free-market economy with rapid real-time price signals.
Where are the tariffs and subsidies of the 1970s? Where are the nationalised corporations?
Where is the exchange rate control?
Muldoonism wasn’t an economic switch that got turned on in 1975.
It was a case of clinging far too long to the command-and-control policies of the post-war recovery.
Meanwhile, on the left there are those berating Grant Robertson for not borrowing more to fix everything that is wrong with the world.
This assumes that the Government is able to deploy the money it borrows efficiently.
Even if you give our politicians the benefit of the doubt on competence, now is not an easy time to get things done.
The economy is running hot and bumping up against capacity constraints.
In other words, getting staff and supplies to build things is very hard.
That’s a big part of what is driving inflation and points to the flaw in another common argument for more borrowing.
It has never been cheaper to borrow, people say.
This assumes that the cost of borrowing is defined by the rate we borrow at today.
It isn’t. It’s defined by the average rate we pay for the money – usually over 20 or 30 years.
When we borrow, we should consider what rates might look like in a few years’ time.
Reserve Bank Governor Adrian Orr has been saying as much in his post-monetary policy briefings.
He’s warning about mortgage borrowing, not fiscal policy – which is outside his brief.
His concern is with ordinary New Zealanders who may find themselves over-exposed to housing debt when rates rise.
Which they will, eventually.
In what should come as great relief to mainstream New Zealand, the plan is to raise them in an orderly, well-signalled manner.
In a big symbolic call last week, the Reserve Bank published a forward rate track for the first time in more than a year.
That track forecast rates to start rising in the second half of next year as inflation pressure builds.
Conditional on assumptions (which could change) – it assumes that the OCR will be back at pre-Covid levels by the middle of 2024.
That’s an OCR at about 1.75 per cent, which is still historically on the low side but could easily see mortgage rates rise by more than 50 per cent.
That, says Orr, is simply because the economy is “evolving back to a more normalised position”.
Getting rates back to neutral is important because it renews the capacity of central banks to apply stimulus when the next crisis hits.
The fact that New Zealand may step out on this path sooner than many other nations is a very good thing.
It reflects the relative strength of our economy.
It’s not just that a strong economy and inflation pressure will require rates to rise. It’s that our economy is strong enough to handle them rising.
Perhaps they won’t rise as fast or as far.
Orr appears open to all possibilities on inflation and that is a very good thing too.
He and the Reserve Bank are not backing themselves into a corner – debating whether rising inflation is a short-term Covid phenomenon or whether it reflects a deeper structural shift.
This debate swings on whether traditional drivers – like shocks to the supply of goods and labour – will dominate.
Or whether the power of the internet and globalised pricing – which has restrained inflation for at least a decade – will dominate.
On balance, Orr says, the world is still “more the same than different”.
But he remains open to the possibility of structural change.
There’s no reason to assume that deflationary pressure of the past decade or two will be any weaker, he says.
Especially given the acceleration of tech adoption we’ve seen through Covid.
This is the grown-up thinking of someone able to hold two or more complex ideas in his head at once.
It shouldn’t be surprising.But it is reassuring.
Don’t believe the hype. Our Reserve Bank remains cool, calm and focused on a careful balanced path out of the Covid era.
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