Local government rates go up followed by interest rates.

Energy prices go up followed by interest rates.

So people are made worse off by increases in prices for goods and services that they cannot easily deflect or cut back on. That’s hard.

But wait there’s more, like a boxer climbing off the floor after a big punch they are hit again even harder by interest rate rises.

And to cap it off it’s all their fault.

I must be missing something here.

The only result of this type of policy is a regular cycle of boom and bust with more and more people forced into bankruptcy for no good reason.

It could be argued that interest rates should be cut in this scenario so that people are not forced to seek higher wages to compensate.

The main concern in the inflation issue is asset and commodity prices. But really its asset prices that are the culprit. They have been driving the global economy for many years now, most notably since financial deregulation in the 80s.

Talk has surfaced recently of the Treasurer invoking a clause in the Reserve Bank Act to move the inflation target aside in order to focus on the exchange rate. Whilst this is a bit far fetched it is another symptom of the policy malaise NZ is facing.

The Reserve Bank Governor has made the same mistake many others have before him: not understand the role and process of bank credit.

It’s as simple as that.

Using an inflation target to manage an economy is like riding a bike with one eye closed. Eventually you have a write off.

Tags: banking, central banks, economics, housing, inflation, interest, money, new zealand, policy ideas, reserve bank of new zealand, Uncategorized