ADRIAN ORR our NEW RBNZ GOVERNOR

[Aaron]

I don't think you can allow inflation to run rampant. Brent crude has now gone through USD 90 a barrel and rising oil prices flow through every part of the supply chain. It's not as simple as just pain at the pump for motorists, it's higher costs for goods across the board. The choice is stark: either the RBNZ raises rates and the NZD maintains its purchasing power, or we become a banana republic battling high inflation.

No matter what the RBNZ does, households will face higher costs either way. If they raise the OCR it means higher interest costs, if they do nothing it means higher costs for goods and services. There is no way out of this for highly indebted households. So the RBNZ just has to raise the OCR and turn down the credit spigot and maintain the purchasing power of the NZD. People who took on large amounts of debt will have to manage as best they can; they've made their own bed and will have to live with the consequences of their own actions.

I don't think you appreciate the inflation free lunch. Prices will rise but so will wages (probably not as much) so the highly indebted get to pay back their loans with worthless tomorrow dollars. 10 years of 5% inflation halves your loan all else being equal. Hard on people who don't have any wealth but great for the risk takers or those already wealthy.

Inflation is a tax and it hits the poorest the hardest but after John Key raising a regressive GST to reduce progressive income tax rates it has become obvious. The poor don't vote so they get what they deserve good and hard.

It is hard to see central banks doing anything as they need inflation to clear the debt. The only problem is they seem to be increasing the debt just as fast as inflation is getting rid of it.

Why do you think property investors prefer interest only? It is because central banks can take care of their debt they don't need to repay it.

Inflation could also be considered theft, but it is state sponsored so it is OK legally but morally...? who knows.
https://www.rbnz.govt.nz/research-an...in-your-wallet


The balance is rescuing the poor from soaring inflation with rescuing the rich from asset-wealth destruction. I think we can guess which way it going to go based on recent history.
https://www.zerohedge.com/economics/...ly-hawkish-fed

[Logen Ninefingers]

I don't think you appreciate the inflation free lunch. Prices will rise but so will wages (probably not as much) so the highly indebted get to pay back their loans with worthless tomorrow dollars. 10 years of 5% inflation halves your loan all else being equal. Hard on people who don't have any wealth but great for the risk takers or those already wealthy.

Inflation is a tax and it hits the poorest the hardest but after John Key raising a regressive GST to reduce progressive income tax rates it has become obvious. The poor don't vote so they get what they deserve good and hard.

It is hard to see central banks doing anything as they need inflation to clear the debt. The only problem is they seem to be increasing the debt just as fast as inflation is getting rid of it.

Why do you think property investors prefer interest only? It is because central banks can take care of their debt they don't need to repay it.

Inflation could also be considered theft, but it is state sponsored so it is OK legally but morally...? who knows.
https://www.rbnz.govt.nz/research-an...in-your-wallet


The balance is rescuing the poor from soaring inflation with rescuing the rich from asset-wealth destruction. I think we can guess which way it going to go based on recent history.
https://www.zerohedge.com/economics/...ly-hawkish-fed

If you can pay back your loans like that between inflation & the interest rate rises then well done. Will be interesting to see how much free cash flow highly indebted households have when they are hit by rises in two areas. When economists warn that rising interest rates could prick asset bubbles and cause prices to start falling then I pay attention. The US housing market crash was caused by defaults at the sub-prime end, not by defaults by the wealthy. But one area of the market faltering will flow through and effect everyone's equity position. Most people won't even realise they are over-leveraged until its starkly apparent that they are.

[Logen Ninefingers]

I don't think you appreciate the inflation free lunch. Prices will rise but so will wages (probably not as much) so the highly indebted get to pay back their loans with worthless tomorrow dollars. 10 years of 5% inflation halves your loan all else being equal. Hard on people who don't have any wealth but great for the risk takers or those already wealthy.

Inflation is a tax and it hits the poorest the hardest but after John Key raising a regressive GST to reduce progressive income tax rates it has become obvious. The poor don't vote so they get what they deserve good and hard.

It is hard to see central banks doing anything as they need inflation to clear the debt. The only problem is they seem to be increasing the debt just as fast as inflation is getting rid of it.

Why do you think property investors prefer interest only? It is because central banks can take care of their debt they don't need to repay it.

Inflation could also be considered theft, but it is state sponsored so it is OK legally but morally...? who knows.
https://www.rbnz.govt.nz/research-an...in-your-wallet


The balance is rescuing the poor from soaring inflation with rescuing the rich from asset-wealth destruction. I think we can guess which way it going to go based on recent history.
https://www.zerohedge.com/economics/...ly-hawkish-fed

It is hard to see central banks doing anything as they need inflation to clear the debt.

It may be hard for you to see but it has already started happening. Price stability is in their mandate and it is politically untenable to have inflation running rampant and unchecked. The RBNZ has raised the OCR already and ANZ Bank's economists are now forecasting that the Reserve Bank will need to increase the Official Cash Rate (OCR) to 3% by April next year, compared to their previous forecast of just 2%. No point having our heads in the sand about this, rate rises are on their way.

[Panda-NZ-]

It is hard to see central banks doing anything as they need inflation to clear the debt.

To clear the debt they own themselves? hardly.

[Logen Ninefingers]

To clear the debt they own themselves? hardly.

That was a quote from Aaron, not me.

[Aaron]

To clear the debt they own themselves? hardly.

What I mean is that across much of the western world china and japan included I believe debt to GDP has increased significantly, more so over the last couple of decades.

Japan now can't raise interest rates without bankrupting the govt and the US seems to be heading toward a similar position. If these govts don't intend to pay back their debt then they can default or they can inflate away the debt. I think what we are seeing is debt being inflated away. This is also true for over indebted corporations (think zombie corps) and indebted investors (think interest only loans on residential property).

The borrowings that central banks have encouraged through low interest rates and loose monetary policy are becoming so large that destroying the value of the currency they are denominated in (inflation) is the only solution to getting rid of the debt. Central Banks will never have a problem with debt as they can always just print some more money to sort things out. That is why they are supposed to be independent of govt. as politicians can't be trusted with the money printer.

It turns out neither can incompetent (weak, greedy, lazy or possibly evil(take your pick)) central bankers.

Inflation running at almost double the top end of their inflation target would indicate failure by the RBNZ. The Large Scale Asset Purchases I think nztx was referring to a few posts ago was the RBNZ not the govt. That is why Orr and Bascand have both tried to downplay the RBNZ's role in a nearly 30% annual rise in house prices, they both know they are largely responsible and like me are probably wondering why they aren't being held accountable. To be fair in hindsight it is easy to see that it was a massive overreaction, probably not so easy at the time, but take responsibility for your actions Adrian Orr like any good leader does.

[Logen Ninefingers]

I guess what I mean is that across much of the western world china and japan included I believe debt to GDP has increased. Japan now can't raise interest rates without bankrupting the govt and the US seems to be heading toward a similar position. If these govts don't intend to pay back their debt then they can default or they can inflate away the debt. I think what we are seeing is debt being inflated away. This is also true for over indebted corporations (think zombie corps) and even some over indebted households.
The borrowings that central banks have encouraged through low interest rates and loose monetary policy are becoming so large that destroying the value of the currency they are denominated in is the only solution. Central Banks will never have a problem with debt as they can always just print some more money to sort things out.

Aaron, you do not want to go down that path because it leads to hyperinflation. Believe me, endless money printing is not the answer to this problem, particularly when the US dollar enjoys the status of the worlds reserve currency. If they trash their money to the extent that you are suggesting then they will lose that status and they will never get it back. We could talk about Weimar Germany when we talk hyperinflation, but there are actually more recent examples including Zimbabwe and what is going on now in Venezeula and Turkey. Once a currency collapses you are not on a path to some sunny uplands of prosperity, you are on a path to starvation and dystopia.

[Aaron]

Aaron, you do not want to go down that path because it leads to hyperinflation. Believe me, endless money printing is not the answer to this problem, particularly when the US dollar enjoys the status of the worlds reserve currency. If they trash their money to the extent that you are suggesting then they will lose that status and they will never get it back. We could talk about Weimar Germany when we talk hyperinflation, but there are actually more recent examples including Zimbabwe and what is going on now in Venezeula and Turkey. Once a currency collapses you are not on a path to some sunny uplands of prosperity, you are on a path to starvation and dystopia.

I don't want to go down that path for all the reasons you mention and also inflation is considered theft (per the RBNZs own John Mcdermott) and morally reprehensible even though targeted inflation indicates a little bit is acceptable to an economist.

I am very upset that society is being lead down this path by weak central bankers who have given up on their price stability mandate. I think it has been pointed out that since Alan "bubbles" Greenspan responded to the dotcom bust with lower interest rates and easy money, the resulting debt problem in 2008/09 was solved with more debt, the March 2020 sharemarket crash was fix with even larger money printing. Do you see a pattern forming.

Even 0% was no boundary. Negative interest rates actually happened and they are happening (in real terms), this is insane but there is no rush to reverse course from what I can see.

[Logen Ninefingers]

I don't want to go down that path for all the reasons you mention and also inflation is considered theft (per the RBNZs own John Mcdermott) and morally reprehensible even though targeted inflation indicates a little bit is acceptable to an economist.

I am very upset that society is being lead down this path by weak central bankers who have given up on their price stability mandate. I think it has been pointed out that since Alan "bubbles" Greenspan responded to the dotcom bust with lower interest rates and easy money, the resulting debt problem in 2008/09 was solved with more debt, the March 2020 sharemarket crash was fix with even larger money printing. Do you see a pattern forming.

Even 0% was no boundary. Negative interest rates actually happened and they are happening (in real terms), this is insane but there is no rush to reverse course from what I can see.

You are right that it started under Greenspan with ultra-low interest rates leading to the US housing bubble which burst in 2007 / 2008.
The response from central banks was to blow up more asset bubbles to induce a 'wealth effect' (people feel richer when asset prices increase) and get people spending in the economy. 'Money printing' and interest rate suppression has been used to artificially inflate asset prices.
Asset bubbles are dangerous. They need to be defended by further central bank action, or they pop. For more than a decade, central banks have continued to inflate these asset bubbles. They say water finds its level. You cannot inflate assets far above their true values indefinietly. We are soon to pay the price for what the central banks have done.