ECO-ECONOMY IS A SCOOP FREE EMAILER
--> FREE DAILY SCOOPS & LOOPS BY EMAIL - CLICK HERE
--> TO CHANGE SCOOP NEWSAGENT OPTIONS - CLICK HERE
Eco-Economy: There is No Alternative
Dr Finlay Thompson
The Reserve Bank will want to raise interest rates yet again. Inflation is lurking everywhere and our over-heating
economy will be in need of the wet blanket again. Governor Don Brash will stand at the podium and announce seven percent
interest, the media will ask experts, and Michael Cullen will look helpless.
The Reserve Bank will maintain a healthy distance from the public debate. This is the desirable stance for an
independent central bank. Our Reserve Bank is a model of independance and rationality. Our Reserve Bank acts according
to the mathematical rules of economics: interest rates and inflation, exchange rates and current accounts.
When the Reserve Bank raises interest rates again, we are told, and most would agree, that There Is No Alternative.
It is clear where power lies in our political and economic system. The Reserve Bank controls the money supply and
treasury puts strict controls on government spending. Our new Labour government has come under attack from "Business" in
the media for even suggesting a few labour market reforms. Let's remember that the government has not actually acted
yet! We are locked into a left versus right debate, with workers and poor supporters of the Labour and Alliance versus
employers and wealthy supporters of National and Act. But the political line in the sand is in the wrong place.
The real conflict of interest is between the productive sector and the financial sector. The interests of employers,
small businesses, farmers and the self-employed are much closer to those of workers and our poor than to the banks' and
financial institutions'. The productive sector, involved in real wealth creation, is in direct competition with the
financial sector for profits.
All political leaders in New Zealand should be demanding explanations from the Reserve Bank. We all know that the
government has no impact on the direction of our financial system. It is about time we started getting some answers
about why interest rates must go up.
Every time interest rates go up, people are forced to close small businesses and sell houses. We all know how interest
rate hikes push out of business any profitable enterprise that earns less than 6.5 percent. We all know that as interest
rates go up the rent we pay in the form of mortgages goes up. Unless we can find some more income we will sell the
house.
But the question we should be asking is, how do interest rate increases hold back inflation? The key to understanding is
in the amount of money (M3, or money supply) in the economy and how it grows and shrinks. Money is created when banks
make loans, and destroyed when people pay back their loans. High interest rates discourage people from borrowing and
slow down the money creation. Of course the money supply must grow to cover the interest owing. Deputy Governor Murray
Sherwin recently replied to New Zealand Banking Reform member Deirdre Kent:
"Money creation is a function of the broader financial system. The loans made by one bank may become a deposit at
another bank, and thus underpin a further loan. It is only in that sense that the process of lending creates new
deposits which count as a part of our definition of 'money'."
Money creation should be the responsibility of the Reserve Bank. Almost all of our money is debt, and so earns interest.
We are paying rent for our money. There is another way. The government can create debt-free money. In fact our
government used to create debt-free money, but it stopped doing that in 1989 when we handed control of money creation to
the commercial banks with the Reserve Bank Act.
Since then the money supply (M3) has more than doubled. That is a compounding annual rate of more than 6.5 percent over
the last ten years. Has the real economy (GDP) had that much growth? No! So where is the inflation? Luckily for the
Reserve Bank, the price index does not include interest rates. As most people have noticed, our property market has
inflated dramatically over the last ten years. Rent and mortgage costs have increased considerably across the whole
economy.
More money, higher prices. Bank-created money, higher rent.
--> FREE DAILY SCOOPS & LOOPS BY EMAIL - CLICK HERE
http://www.scoop.co.nz/cgi-bin/newsagent/new_user.cgi?form=home
--> TO CHANGE SCOOP NEWSAGENT OPTIONS - CLICK HERE
http://www.scoop.co.nz/cgi-bin/newsagent/mail_control.cgi