The Kākā by Bernard Hickey

TLDR: This week in our political economy and in the global economy:

* the Retirement Commissioner called for changes to the Accommodation Supplement and for much more housing for the elderly because of an expected doubling of retirees struggling to pay their rent or mortgage from NZ Superannuation; Tuesday’s email

* the Government offered concessions to farmers refusing to cooperate on emissions reductions, including expanding the types, numbers and value of trees they could claim to offset methane and nitrous oxide emissions; Thursday’s email

* protests against the Chinese Government’s super-strict covid controls spread last weekend in a way that threatened to challenge the Government itself, but a police crackdown has quietened the protests and now Beijing is looking to accelerate vaccinations and ease the controls; Monday’s email

* ANZ’s economists forecast a peak-to-trough fall in wage-adjusted house prices of 32%, which would see prices back 10% below pre-Covid levels by next year’s election; Wednesday’s email; and,

* US Federal Reserve Chair Jerome Powell appeared to pivot the world’s largest central bank towards slower interest rate increases, just as Aotearoa threatens to sharply increase our rate hikes. Thursday’s email

Other places I’ve been

I also spoke on NewstalkZB about the Retirement Commission’s report.

Substack of the day

Ka kite ano

Have a great weekend

Bernard

PS: Lynn and I are in Australia visiting friends and family this week and next week, so we’re doing a bit less. It also means no Ask Me Anything or Hoon this coming Friday Dec 9. We’ll be back for the final AMA and Hoon of the year on Dec 16.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: In a big week for our political economy:

* Te Putea Matua (the Reserve Bank) decided to force the economy into a recession around next year’s election to bludgeon inflation down from 7% to 2%;

* Governor Adrian Orr expressed regret in a statement to a Parliamentary Committee about the economic shocks and the higher-than-target inflation and admitted the bank’s actions had contributed to it;

* National Leader Christopher Luxon withdrew his promise to repeal the 39c income tax rate, saying the economic conditions had changed; RNZ

* The MakeIt16 campaign to lower the voting age won its Supreme Court appeal against the voting age of 18 being consistent with the Bill of Rights outlawing discrimination on the basis of age, prompting Labour to promise a Parliamentary vote on the issue, although National and ACT said they’d block it getting the required 75% majority; and,

* China’s covid outbreaks widened in several major cities, forcing fresh lockdowns and riots around the mega-factory that makes iPhones, while a deadly fire in a (literally) locked down apartment building sparked riots in Xinjiang and Beijing. Reuters

So what?

The RBNZ’s much-harsher-than-expected approach means it has decided to engineer a recession to beat inflationary expectations lower. It also demonstrated its political independence with an exclamation mark because if the plan works, the Labour Government will be trying to get re-elected late next year, while:

* the economy is in recession;

* unemployment is headed for 5%;

* house prices will have fallen almost 20% from their peaks;

* new fixed mortgage rates will be over 7%; and,

* inflation will still be more than double the RBNZ’s 1-3% target range.

In effect, Labour’s already difficult job of getting re-elected for a third term, just became a lot harder. Aspiring Finance Ministers Nicola Willis and David Seymour should quietly be sending Adrian ‘the Grinch’ Orr thank you notes with their Christmas Cards, although probably not enough to say they’re looking forward to working with him as his boss/es.

But is the tightening justified?

A strict reading of the Reserve Bank Act gives the bank every right to tighten as much as it projects it needs to in order to get inflation down to around 1-3% within the next couple of years. Inflation at over 7% is certainly well outside the band and there seems to have been some semi-permanent supply shocks in the global economy and here that would require a response.

Reserve Bank Chief Economist Paul Conway, in our interview on Thursday, pointed to labour shortages here due to covid sickness and lower migration, along with labour shortages in China due to its falling working-age population and end of its big internal migration of poorer farmers in central China to the east and southern coastal factory regions. He also thinks a long-warned-about ageing of developed world populations has also worsened the labour shortages.

There’s also the geo-political shifts that are frustrating more globalisation as some companies ‘onshore’ and ‘friend-shore’ their supply chains back into the American-led or European-led blocs to reduce their exposure to China’s military-and-security-industrial complex. For example, just yesterday, the United States banned sales of ZTE and Huawei equipment sales because of concerns about how China’s Government could use the gear to gather information remotely. Reuters

But some of the inflation will be temporary. Oil prices are back down below their pre-war levels again and the covid effects on work forces will eventually subside. The permanence of the de-globalisation and ageing populations issues is also a matter for debate. There is actually not much of a reversal of offshoring or a drop in trade volumes happening, but certainly the growth of the integration of the global economy has stalled. I think there’s still plenty of globalisation to happen in the services sectors via global cloud computing, but that’s also unproven. I also think it’s way too soon to think that all the migrant labour flows that have been growing for decades have somehow stopped or been blunted permanently because of covid.

The big questions to ask

The first big question to ask is whether we (and the Reserve Bank) can rely on its own forecasting. It was wrong in the 10 years before covid by over-forecasting inflationary pressures and under-forecasting the ability of the labour market to grow via extra participation and migration. It was wrong during covid by not forecasting the labour market effects of covid or the war in Ukraine. It should be forgiven for both of those errors because everyone else was wrong and it was slightly less wrong than most others. In the end, we all have to rely on the bank’s forecasting and its models and hope they keep updating them fast enough and well enough to take account of these changes as they happen.

The second big question to ask is whether the bank should have to get inflation back down to around 2% within a quick couple of years, or whether it should cut itself some slack to allow longer and be more tolerant of inflation that is a bit higher in the long run at around 3-4%, especially if its because of labour shortages. There are quite a few serious economists saying the number to target should be 4% rather than 2%, and that a little bit of inflation is not a bad thing in the long run, especially if it reverses a decades-long shift in income from workers to shareholders.

But that different approach would take a change in the Reserve Bank’s legislation and a debate about the role of inflation targeting in wealth and income distribution. I don’t think we’ve thought or researched enough into how the decades-long obsession with getting inflation and keeping it there generated an economic framework that worried too much about wage-price spirals and not enough about inflation caused by companies using their market power to increase prices and their profit margins. The end result was using the levers of monetary policy to always ensure there was a surplus of labour, which gave companies more power to engineer higher profit margins and higher income shares for capital.

Have a listen to this to see how little the Reserve Bank has thought about it, or sees it as a problem.

Quotes of the week

Christopher Luxon changing his mind after the RBNZ rate shock

“Let's get really sobering about the reality of this. Interest rates are going to continue to rise because inflation is stubbornly high, and we are now heading to a recession.”

“We would like to offer people tax relief, but when I look at things ... if I think about the 39% tax rate in particular, that's something that I really want to think about. The situation has changed big time.

“We've been crystal-clear to say that the economic conditions will determine what we can achieve in our first term in government and so we will take stock of where we sit today and we will revisit where we are." Christopher Luxon

Robertson renewed his attack on Luxon after that

"I just don't think you can trust National on tax. There's been so many U-turns over the few weeks on policy, it's hard to keep up. We don't need people whose first reaction is to panic.” Grant Robertson after Luxon’s comments.

Adrian Orr finally has a regret on the RBNZ’s ‘least regrets’ policy

“On behalf of the Monetary Policy Committee, we are sorry that New Zealanders are being buffeted by significant shocks and inflation is above target.” Adrian Orr to the Finance and Expenditure Select Committee this week.

Scoops of the week

Chart of the week

Useful longer reads

Soberings, spookies, curiosities and feel-goods

The Craic

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week’s tougher-than-expected moves by Te Pūtea Matua (the Reserve Bank) to engineer a recession next year to get inflation back under control has surprised a generation that became inured to low and stable inflation and interest rates.

I spoke to Reserve Bank Chief Economist Paul Conway yesterday about why the bank is cracking down so hard, and whether it could have waited longer for inflation to subside naturally. He details why the supply shocks from Covid and the war in Ukraine cannot be ignored. The full interview is in the podcast above and there is a full transcript below.

Lynn and I are now travelling on holiday (mostly) in Australia for the next couple of weeks, which means we’re dialling back our weekly features on a Friday until Friday December 16. That will conclude our last full publishing week of the year. We’ll have a final Ask Me Anything for 2022 at midday on December 16 and a final ‘Hoon’ at 5pm on December 16. I’ll still produce daily Choruses Monday to Friday through to December 13, but will not do quite so much. This is our first proper holiday since we launched paid version of The Kākā and will get to see our Australian family and friends for the first time in three years.

 A lightly-edited transcript of our conversation

Bernard: Welcome to The Kākā to Paul Conway, who is the Chief Economist at the Reserve Bank. It’s been a busy week?

Paul: It has been another busy week. To get the latest Monetary Policy Statement out the door — on top of our RAFIMP five-yearly review of monetary policy, which went out the door a week and a half ago — feeling pretty satisfied to get those two chunky bits of work out into the world.

Bernard: And it's been a big week because 75 basis points is the biggest hike since the Reserve Bank started using the official cash rate in 1999. And there's been a hike every decision so far this year. And for a generation of people watching interest rates, thinking about mortgages and thinking about the economy, they've never seen 7% inflation and four percentage points of increases in the official cash rate before.

So could you explain for people why there's been such a big change, why there was also a big increase in the forecast track for the official cash rate now, what's changed in three months that meant that the Reserve Bank has had to do all?

Paul: We've been tightening policy for a little over a year, and we've done 400 basis points or 4%. We've increased the official cash rate from a sort of emergency low of 0.25%, which was put in place in 2020 going into the pandemic. As you said, it's the most rapid escalation in the official cash rate since we've had the official cash rate.

That speaks to how quickly the economic environment has changed from one in which, going into that pandemic, it was all very serious, with a risk of a massive recession, if not a depression and double digit unemployment, impinging on people's wellbeing. And the call then was let's go hard, both in terms of fiscal policy and in terms of monetary policy.

Now 18 months, two years down the track all of that worked and instead of having double digit unemployment, we've got inflation up at seven 7.2%. So that's what we are pushing back against: how do we contain inflation?

So why is the engine red-lining now?

Bernard: For 20 years or so, the engine room of the global economy and our economy, had a certain speed limit and capacity and seem to be able to handle quite low interest rates without generating lots of inflation. What's changed in that engine in the last couple of years? Why are we past the red line and we're overheating?

Paul: I do think the pandemic accentuates trends that were already underway in the economy. Over that pre-pandemic period, economists used to talk about the great moderation where the business cycle was really minor. Inflation was low and stable. The challenge was actually to get inflation up to the 2% midpoint of the Reserve Bank's target band.

And that was tough, although a good problem to have in hindsight. The reason being we lived through positive supply shocks, technology shocks. We were getting better at producing stuff. We also had, globalisation came along and China became the workshop of the world and exported deflation with cheap, cheap products that were made very efficiently, very competitively. Demographics were also on our side. The working age population was increasing over that time.

And workers tend to produce more than we consume, because we save, ideally, which again is deflationary. And a lot of those things have turned around. So globalization — I don't sort of buy into the idea it’s going backwards, but it's definitely peaked and it's definitely changing.

The world is splintering into different factions or clubs of countries. So globalization, at least for the meantime, isn't being that sort of dependable deflationary force. China’s inward migration of people from the west of the country or the farms in the west to the cities in the east has sort of slowed down and demographic change has also slowed down.

We're back to worrying about aging populations around around the world, the OECD and here in New Zealand. They're all big slow moving forces, but the pandemic has hastened that switch. So obviously we are grappling with too high inflation at the moment and a labour market that's overheating beyond maximum sustainable employment.

We’ll sort all that out definitely, but I think we are entering into an economic period that is a bit more volatile, these kinds of supply shocks come along a bit more regularly. We will probably see that underlying inflation a bit higher than what it's been over the last decade or two.

So what are the permanent and temporary supply shocks?

Bernard: Let's talk about those demand and supply shocks. We can understand there's been some demand shocks in that a few more people had a bit more money during covid. There were cash payouts all around the world from governments and sometimes to companies. We had had very low interest rates for a long time, and in some places people used quantitative easing to push down interest rates further out, and New Zealand did that for the first time.

But on the supply side, I'm trying to understand what are the permanent supply shocks, and what are the ones that might be temporary? I can see with Covid that people had to stay home for a few weeks. Maybe there are a few people sick, but how much of the supply shock is permanent, and therefore we have to really adjust for it and think about it, and how much of it is temporary that maybe we could just let go through to the keeper?

Paul: When we were all in lockdown the first time, that was a huge supply shock because not all of us could just keep on working from home, but obviously temporary, because we can't do that for the rest of our lives. So that’s been and gone to a large extent, although sickness is higher now than it used to be. Who knows how that's going to play out, and I think that that is significant.

In the last MPS we were factoring 2% of the labor force being out at any one time with Covid and with winter illnesses, which will be easing up a bit now as we move into into summer. But again, that’s a supply shock, that's at least semi-permanent in that it's persisting into the future.

Then there’s the scarring effects

Then you could think about other supply shocks coming out of the pandemic, around what economists call scarring effects, like education. I was really feeling for the year 12, year 13 kids who had exams and even first year university, where it's meant to be all fun and you sort of come together and all that, and it kind of didn't.

I think there's a risk there and we are sort of seeing it with low rates of kids going to school, that sort of scarring effect that can persist for some time into the future. It cuts to the question that central banks were grappling with last year, around is the inflation that we were starting to see, is it going to be temporary, or is it going to be persistent?

If it's temporary, central banks tend to look through it, especially if it's something like an oil shock or something like that, there's nothing we can do about it. So there’s no sense in changing interest rates, throwing the economy around, to sort of deal with this shock that we can't do anything about, and it'll sort of look after itself in due course.

But if inflation more permanent, so getting into core inflation and inflation is feeding into wage expectations, and then wages are feeding back into, higher prices, that is exactly the kind of thing that a central bank will lean against.

I think the inflationary pressures we've been living through, they're obviously more permanent than people were thinking a year or so ago, but there's still a reasonable possibility that some of that inflationary pressures will fall away reasonably quickly.

Touch Wood. Fingers crossed.

How much could we have let go through to the keeper?

Bernard: So that was the Covid supply shock. And then no one knew what Vladimir Putin had up his sleeves. So that's an energy market supply shock that unleashed all sorts of forces around world energy system, with electricity and gas and LNG.

How much do you think of the Russian invasion of Ukraine is a temporary supply shock that we can let go through to the keeper. And how much is a permanent thing we have to really think about.

Paul: We've been exposed to a whole series of supply shocks. The pandemic was one and we responded quite appropriately with fiscal support and and really loose monetary policy to keep people attached to the labor market. So incomes actually didn't take a hit over that period, which is one reason why demand stayed quite strong through that period. The labour shortages kind of came a bit later, but with a really tight labor market, and supply chain disruptions.

And then just as we were getting our heads around all of that, along came the conflict in Ukraine, which send a shudder through global energy markets and global food markets as well. Between them, Russia and the Ukraine exported something like 13% of global calories prior to the pandemic.

So this has been massive and is causing all sorts of problems throughout the world, in developing countries in terms of food prices. Hunger is going up, and to some extent we're a bit isolated from it here in New Zealand, particularly the energy aspect.

Yes, we get it through oil prices, but we're obviously self-sufficient in terms of electricity. What you see when you look at inflation rates around the world, the countries that are closest to Eastern Europe are at the epicenter of high headline inflation that's being driven by high energy costs and high food costs.

The further away you get from that, the less those costs are impacting on headline inflation. So in New Zealand, for example, our headline inflation rate currently is among the lowest in the OECD, which is still far too high and we have to fix it, but in a relative sense, we are being spared the worst effects of that crisis.

How much is domestic and how much is from overseas?

Bernard: How much of the inflation is generated here? We've had people with Covid as well, and obviously with the restrictions on people coming in and out now through Covid, our ability to add extra labour into the labor supply has created a labour supply shock. And how much of the inflation is overseas demand and supply?

Paul: It's a little bit tricky to separate them. Tradables inflation, inflation that comes over the border, goes into inputs of businesses and then affects the prices of their products, which might be what we call non tradable or homegrown inflation.

But our best estimates at the moment are that half of the 7.2% inflation right now originated overseas and about half is homegrown. Those external inflation shocks or tradable inflation shocks, they came over our border and they hit a really tight labor market.

That kicked off that homegrown or domestic inflation that we are now pushing back against. So it's been a really interesting period in terms of inflation dynamics and as you say, many listeners, won't have seen this before.

You and I are lucky, Bernard, we've actually seen it before in the late eighties.

Bernard: For those people who wonder ‘it's not my fault that we've got all this inflation. I didn’t do Covid and Putin did Ukraine – how come I'm now having to pay for it with higher mortgage rates?’

Can't we just wait for this to wash out of the system and no one get hurt? No one loses their jobs.

Paul: First of all, the labour market is so strong that there's a lot of jobs out there at the moment. There's a lot of vacancies out there at the moment, which is great.

That's a real bedrock of our economy at the moment. And if the labor market stays strong, like we're projecting, with with the contraction of economic growth coming up next year. It could be job rich contraction.

We're all part of this system. We're not islands. So yes, I do see the economy as a sort of collective, a community of people really, and what happens to it affects all of us, uh, one way or another.

Supply was shocked lower, so we have to lower demand

Inflation in a typical business cycle would be where demand would get out of the box for whatever reason, and we'd put on the brakes and it would slow down. But now it's more supply side. Inflation is more driven by what's happening on the supply side, but there's still excess demand in the economy.

So essentially we have to respond in the same way. We call it the output gap, the difference between aggregate demand and aggregate supply. And we have to close that one way or another.

If only there was a positive productivity shock

A positive productivity shock would be great. We could increase the supply capacity of our economy and that would be disinflationary. Say, greater competition in New Zealand markets, as we’re seeing with supermarkets and fuel retailers in the like.

That's all very positive as well and will keep inflation pressures contained, but none of that is likely to have an effect over the next 18 months, two years. Any productivity boost would be too slow, so it falls to the Reserve Bank to engineer a slow down in aggregate demand.

But what about a profit margin-price spiral?

Bernard: So overseas we've seen the likes of the US Federal Reserve Vice Chair Lael Brainerd point to higher profit margins there as potentially responsible for some of the inflation. What are we seeing here in terms of profit margin expansion? Is it actually part of the reason for the inflation?

Paul: Unfortunately, we don't have great data on profits. It’s a real blind spot in hows we measure our economy. So I can only answer in an in-principle sort of way.

It is true that we fret about the possibility of a wage-price spiral, that higher prices are going to feed into higher wages and so on and so forth. What happens on the profit side of the equation, if firms are able to increase their profit margins for no good reason, it’s a battle that's existed over millennia between the owners of capital and the owners of labour.

As economists, we summarize it as a thing called the labour income share. So what share of national income is being paid to the owners of labor, and what share is being paid to the owners of capital?

We’re all for higher wages. It's obviously a fundamental driver of wellbeing in our economy, but they have to be based on productivity improvements. So if productivity is going up, we're creating more for less, and there's more surplus for workers and for the owners of capital.

If wages are going up more quickly then productivity, which hasn't happened for a while, then the labor income share would be increasing. Whereas if wages are going up more slowly than productivity, then that labor income share would be decreasing. What we’ve seen internationally, at least lately, or at least pre-pandemic, is consistent with the situation you were talking about.

So the labor income share has been declining across a bunch of OECD economies as technology has made it easier to swap workers out. Trade unions don't have the bargaining power that they once had. So it’s been in favor of the owners of capital.

Now that pendulum is very much swinging back to being in favor of workers. The competition for workers in the labour market is bidding wages up. Um, so I think, um, you know, I'd be interested to know more about that Lael Brainerd stuff in the US, but economist intuition at the moment tells me that the labour market is so tight.

Then you have to think about what's competition like? Are these firms competing or can they simply put their prices up because they have got a monopoly or a oligopoly? And if they don't, then it's hard to envisage that profit share increasing in any meaningful way.

Are higher profit margins gumming up and overheating the engine?

Bernard: If you think about labour productivity as a very efficient engine that's producing more power with the same amount of pistons and gaskets. You could argue that an engine where the controllers of capital, the businesses that effectively increase their profit margins because there isn't as much competition in the sector, are in a way gumming up the engine. You could argue that’s one of the reasons why the engine is overheating because there's too much gum in there.

Paul: In our monetary policy statement that we put out yesterday, there's a chapter in there on wages, which kind of cuts to this productivity issue. If you look at what's called the labor cost index, which sort of measures the cost for a business of a lump of labor, like just the same amount of worker doing the same amount of work, if you look at wages for that, they haven't been keeping up with inflation.

So there's negative real LCI wage, which we sort of take a bit of comfort from, because it means that the chances of that wage price spiral getting going, we're not seeing too much evidence of, which is fantastic.

But then if you look at broader measures of what's happening with wages through the quarterly employment survey, and as well as accounting for that sort of lump of labor idea, they also factor in people moving between jobs, people working longer hours, getting promotions, going to other employers.

When you look at that broader measure of labor, it is keeping up with inflation. So real wages in that sense are not too bad given the sort of period that we've been through. And the difference between those two is that labour costs for firms are below inflation, so that's good keeping their prices down.

What’s so bad about inflation again?

Bernard: For those who weren't around in the eighties and nineties wondering why everyone's so het up about inflation, when perhaps their wages, as you say, in total, are rising as fast as prices and there’s 3.3% unemployment. Sounds good to me. What's so bad about inflation that we have to really pull the lever so hard.

Paul: There's many problems with inflation. It's a tax on your savings and a pay cut rolled into one, and we are just expending a lot of energy on understanding what's happening with pricing in businesses, and then feeding into wage negotiations.

I kind of think of it like a dog chasing its tail. There's economic energy going into just doing all of that stuff instead of focusing on what really matters. It's a really good question. Inflation's going up. Why is the Reserve Bank turning up and saying interest rates need to be going up as well? Inflicting more sort of pain on people who have debt. We don’t talk so much about savers who probably quite like interest rates going up a bit.

Stopping inflation expectations racing away

The reason we do that is if inflation gets out of control, if it gets embedded in the economy, if people expect inflation's going be 10% from here to infinity, they’re going to demand a 10% pay increase and that spiral gets away on us.

So the thing is now we just try and slow the economy. We get inflation back down into its box, because that's the best contribution that monetary policy can make to economic performance over the longer term, just is to bring balance into the supply side and the demand side of the economy.

And that's what the Monetary Policy Committee is very focused on doing. And I have no doubt that we will achieve that objective and get back to low and stable inflation.

Bernard: Paul Conway, the Chief Economist for the Reserve Bank, thank you.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Te Pūtea Matua (Reserve Bank) Governor Adrian Orr has just demonstrated his inflation-fighting resolve and political independence with a volley of monetary policy tightening and tough talk that will shock parts of the economy to a standstill.

If Orr had put on a Grinch costume and told everyone to give up on Christmas it would fit perfectly with the bank’s actions, forecasts and comments yesterday.

In the process, the Reserve Bank has put a huge dampener on the economy leading up to the festive and shopping season. It will blow away any consumer and housing market enthusiasm that might have been building for the summer. The tourists and the sun will come, but they’ll find a bunch of grumpy locals, especially the real estate, and mortgage brokers. There’ll be some moody Labour politicians too.

The Reserve Bank’s decision to engineer a recession should also put a full stop on any suggestion the Governor was too close to the Government and his Finance Minister boss Grant Robertson. The central bank just made it massively more difficult for the Labour Government to win a third term, which was already in serious doubt.

National Finance Spokesperson Nicola Willis and aspiring Finance Minister David Seymour may not want to keep Adrian Orr if they win next year’s election, but they should be quietly sending him thank you notes in their Christmas cards this year. He may well have just put them in the Beehive.

So what just actually happened?

In summary, the Reserve Bank:

* tightened the Official Cash Rate as expected by 75 basis points to 4.25%, which was the biggest rate hike since the OCR began being used in 1999 and to the highest point since just before its biggest ever rate cut in January 2009;

* said it even considered raising the OCR by a full 100 basis points to 4.5%;

* lifted its forecast track for the OCR to a peak of 5.5% by midway through next year from a peak of 4.1% in its August MPS, which would imply fixed mortgage rates at or over 7% by the election in the fourth quarter of 2023;

* surprised financial markets by its hawkishness because its forecast OCR peak was around 25 basis points above the peak forecast in financial markets just before the release of the statement yesterday,

* forced up wholesale interest rates by around 25 basis points, including lifting the two-year swap rate that mortgage rates are supposed to be based by 27 basis points to 5.28%;

* forecast a four-quarter-long recession totalling 1.0% of GDP that would lift the unemployment rate to 5.0% by the beginning of 2024 and a high of 5.7% a year later;

* forecast inflation would still be over 6% by next year’s election and would not go below the 3.0% upper-end of the target band until late 2024, with an end point of 2.0% by the end of 2025, which was the first time in the bank’s history it had ever forecast would not go below the 2.0%-midpoint of its target bank;

* noted banks had not passed on all of the recent rises in wholesale interest rates into retail interest rates, which it expected to happen in coming months; and,

* deepened its forecast for the peak-to-trough fall in the CoreLogic/RBNZ House Price Index to around 20% from 15% in August, although the bank also forecast at its Financial Stability Report earlier this month it saw a 20% fall.

What the Reserve Bank Governor said

Orr was in particularly hawkish form through the news conference, actively calling on consumers and wage and price setters to tighten their belts and brace for a recession that was necessary to contain inflation.

Here’s a selection: (bolding mine)

‘Cool your jets people’

“Think harder about your spending. Think about saving rather than consuming. Just cool the jets.” Adrian Orr in the November MPS news conference.

‘We need to reduce spending levels’

“What we're highlighting here is that inflation is no one's friend. And in order to rid the country of inflation, we need to reduce spending levels. That means that we will have a a period of negative GDP growth, we think to the tune of around 1% of GDP.” Orr.

‘We need to reset expectations’

“The sooner inflation expectations, the sooner wage expectations decline back to being consistent with our target, then the less work there is for monetary policy to have to do, otherwise it has to come through a drag on spending, which we are imposing through higher interest rates. And the longer that it takes to feed through to inflation, the more costly it is, so it's all about expectations.” Orr

On the debate about a 100 basis point hike

“On the 50, 75, 100, I think it would be fair to say the committee spent more time on 75 versus 100, than they did with 50 versus 75.” Orr

On the risks looser fiscal policy makes the bank’s job harder

“All things all other things unchanged, which they never are, higher government spending means higher demand in the economy, which means upward pressure on inflation for us, and vice versa. So that's a nice simple one.

But then it becomes far more complex because how did they raise their revenue? Was it through increased taxes? Was it through increased funding of spending? And what is the nature of the spending that they're doing? Is it long term infrastructure productive capacity? Or is it more short term welfare spending or whatever?

“So it's always a complex picture. Over recent times, it's been broadly neutral if not, if not slightly negative fiscal impulse. Looking forward we see a risk to the upside. Because of the cyclical place we're in at the moment.” Orr

‘We started below neutral and have a ways to catch up’

“We started from a position of well below any sense of neutral so you had to go a long way just to get to the start line. And we'll be going a long way quickly. What we have been finding is new shocks keep arriving. The world just doesn't stop and let us catch up and the new shocks that have been arriving: Russia, Ukraine, the food, the energy, the weather price shocks, and now the incredible labor shortages. So we have to keep adjusting, adapting, but we are well down the path of the tightening cycle.” Orr

‘We want to tighten fast and then wait’

“We are very eager to to get to a position where we can watch, worry and wait and we can feel confident that inflation will be worn down. Inflation is no one's friend. And so we want to get there sooner. That's why you're seeing quite a steep forward path for the official cash rate.” Orr

Here’s the full video of the news conference for the true tragics.

The key charts from the MPS

The centre of attention: the 140 basis point rise in the OCR track

The lower track for house prices than August

Inflation at 6% come election time

Unemployment 4.8% and rising by election

So what was the reaction?

The tone of the reaction from economists was of shock, although the initial market reactions yesterday afternoon were relatively sanguine, with the 25 basis point rise on wholesale interest rate markets and only a small rise in the NZ dollar. However, the NZ dollar rose a full cent overnight to 62.3 USc.

Here’s a few quotes from economists to give you a flavour (bolding mine), along with audio above in the podcast of my ‘hoon’ with David McLeish from Fisher Funds and Jarrod Kerr from Kiwibank.

‘The most hawkish I’ve ever seen’

“The RBNZ is deliberately engineering a recession to bring the forces of supply and demand back into balance, and to break the back of the inflation cycle. 

“Over the past 35 years we have read thousands of central bank releases and policy statements and it was hard to recall ever reading one that was as outright hawkish as that which the RBNZ published today.” Sean Keane of Triple T Consulting for Credit Suisse

How it ties in with the political outlook

“Our expectation is that by the end of 2023 New Zealand will have a new government with a very different view on immigration, and that the unemployment rate will be higher against the backdrop of a slowing economy, a stronger currency and a reversal in the forces or supply and demand.

“By that time also a large number of fixed mortgages will have been reset to higher levels and the reality of a higher funding rate will be much more real as people make their individual spending decisions.” Sean Keane of Triple T Consulting for Credit Suisse

An OCR with a 6 in front of it?

“Infometrics now expects a peak OCR of 5.75% by mid-2023, with a 75bp rise in February, a 50bp lift in April, and a 25bp increase in May. However, we believe that the balance of risks still lies to the upside, and a 6.0% OCR is easy to envisage.

“We can also contemplate a lower OCR peak if inflation, the labour market, and the economy all soften faster than expected, but we regard this outlook as unlikely.” Brad Olsen from Infometrics.

‘There’s a risk of tightening too much’

“We acknowledge the scale of the challenge that the RBNZ faces in breaking the cycle of rising prices and wages. But for the first time in a while, we’re also thinking about the risk that the RBNZ could end up overcooking it on the inflation front. We now expect OCR cuts to begin in early 2024, six months earlier than we did previously. Those rate cuts are both earlier and faster than what the RBNZ is projecting.”

“Make no mistake, the RBNZ is not just signalling a recession, it’s forecasting a downturn on a similar scale to the Global Financial Crisis – different causes, but similar consequences. On the RBNZ’s forecasts, economic activity continues to fall below its potential long after the recession has ‘officially’ ended.” Westpac Economist Michael Gordon

An economist talks about the only thing that matters in the end

“The Bank has almost halved its assumptions on productivity growth – essentially dropping the economy’s perceived speed limit.” BNZ Economist Craig Ebert

‘It’s a welcome big call’

“Hope is not a strategy. The RBNZ Monetary Policy Committee gets that, and deserves a pat on the back for facing the challenges head-on. If the facts change, they’ll change their minds. But right now, the fact is that high inflation is looking increasingly entrenched, and dithering would only make the problem worse.

“This inflation problem is unlikely to be beaten until retail interest rates have spent a decent amount of time sitting considerably higher than CPI inflation.” ANZ Economist Sharon Zollner

‘Better for the old than the young’

“If you’ve recently purchased a home or you’re about to come off a very low fixed-term rate on your mortgage you are about to feel it. If you have debt that has a variable interest rate of any sort you’re about to feel it.

“Younger people tended to have more debt. Older people with more assets or money in the bank might actually benefit from the higher interest rates.” CTU Economist Craig Renney

What do I think?

I agree with those that fear the Reserve Bank is over-reacting and may drive the economy unnecessarily into a brick wall. I think it will increase the chances of a change of Government by the end of next year.

Charts of the day

Richmond Fed factory survey shows US inflation pressure easing

Substack of the day

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Hopes 16 and 17 year olds might get the vote look set to be dashed again, almost as soon as they were raised by a Supreme Court ruling yesterday that Parliament should consider lowering the voting age from 18 to avoid breaching the age discrimination provision in the Bill of Rights.

National and ACT pledged last night to vote against a Labour proposal to lower the voting age, making the required super-majority to pass it in Parliament virtually impossible without a conscience vote.

Allowing as many as an extra 125,000 people to vote could help reduce a democratic deficit that has built up in recent decades where young renters in particular vote at much lower rates than older homeowners. So far, this deficit has meant the electoral mathematics that would eventually see the centre of political power shift from the baby-boomer bulge to those aged under 50 has been delayed.

It’s a deficit most prominent at council level and cited by the Productivity Commission as a factor allowing suburban land owners to stop new land being made available for housing for the young, along with the necessary infrastructure they would have to pay for with higher taxes, public debt and rates. At general election level, it’s a deficit that helped block any sort of capital gain or wealth tax. It’s the deficit at the heart of the biggest transfer of wealth from future generations to landowners now that’s been seen in modern history. I estimate that shift at over $1 trillion in the last decade.

The old and rich are opting to block the young from voting to reverse the wealth transfer.

But there may be some hope to reduce the deficit at a local level, given a super-majority is not needed to lower the voting age at council level, while a super-majority is needed at general election level.

Paying subscribers can see more detail and analysis below the paywall fold, although I’ve also included a poll below to ask paying subscribers if I should open it up for public viewing and listening by lunchtime. Update: This has now been opened up and can be shared.

A new generation’s opportunity

For a few hours yesterday there was some hope of a boost in political power for new generations wanting to rectify a monumental wealth shift to the older generations that politicians must now keep happy to win.

Te Koti Mana Nui o Aotearoa (The Supreme Court) ruled early in the afternoon in favour of the ‘Make it 16’ case that not allowing 16 and 17-year olds to vote was inconsistent with the Bill of Rights banning discrimination on the basis of age.

PM Jacinda Ardern announced in her post-Cabinet news conference yesterday afternoon after a discussion in the Cabinet meeting that Labour would draft legislation in response to the court ruling to lower the voting age to 16 from 18. Electoral Law requires a response from the Government in Parliament within six months of the Supreme Court ruling being notified to a select committee. She noted that even if passed under the required 75% super-majority, the law change would not be in place until the 2026 election at the earliest.

Ardern said Labour’s caucus did not have a position and she hoped it would be opened up for a conscience vote. She supported lowering the voting age.

“This is a matter where I hope parties feel that they're able to have an open debate and discussion that isn't based on politics, but on their own values and principles.” Jacinda Ardern (post-Cabinet news conference transcript)

The Greens supported lowering the voting age too, but National and ACT came out immediately in opposition. ACT Leader David Seymour said it wouldn’t happen and appeared to suggest ACT believed only taxpayers should have the franchise to vote.

“We don’t want 120,000 more voters who pay no tax voting for lots more spending. The Supreme Court needs to stick to its knitting and quit the judicial activism.

“My proposition to 16 and 17 year old voters is this. There’s only a two out of three chance that you’ll get an extra vote out of this, but you will pay extra tax for whatever crazy thing 16 and 17 year olds voted for at the last election.” David Seymour in a statement.

Statistics NZ figures for the September quarter show there were 145,300 people aged 15-19 who worked and presumably were paid wages and therefore paid taxes in the quarter. That was up from 126,600 working in the same quarter a year ago. I suspect there’s a few 16 and 17-year olds who also pay GST on their purchases. Statistics NZ figures also show an estimated 125,700 16 and 17 year olds were resident in Aotearoa as at the September quarter. If they all voted (see more on that below) that would be enough to change the result of an exceptionally tight election, if they voted one way or another.

National’s Justice Spokesman Paul Goldsmith said National didn’t support lowering the voting age. He said cracking down on youth crime was more important.

“Many other countries have a voting age of 18, and National has seen no compelling case to lower the age.”

“With violent crime up by 21% per cent, a 50% increase in gang membership and a 500% increase in ram-raids, these are pressing matters the Labour Government are failing to get under control. That is why National announced its plan to crack down on serious repeat youth offenders like ram-raiders to turn their lives around and to protect the public.” Paul Goldsmith in a statement.

His leader also said 16 was too young to vote.

"Obviously, we've got to draw a line somewhere. We're comfortable with the line being 18. Lots of different countries have different places where the line's drawn and from our point of view, 18's just fine." National Leader Christopher Luxon told reporters in Napier yesterday. 1News

So why does it matter if the age drops to 16?

Here’s the key chart that explains the problem of the democratic deficit from Electoral Commission data. It shows voting rates of the eligible population by age group for the last three general elections.

From the ages of 18 to 39, there are over 280,000 people who could have voted in the 2020 election if they had voted at the same 85% rate as those over the age of 50. This number of missing voters was down substantially from the 2017 and 2014 elections because of an increase in enrolment rates and voting rates, but there remains a hole in democratic representation by age which is delaying the eventual transfer of power from the baby boomers to those who follow. Lowering the voting age would accelerate that. Assuming the younger 16-17 year olds voted at the same rate as those over 50 in 2020, that would imply an extra 106,845 voters. Adding the ‘missing’ voters from 18-39 creates a potential extra voting pool of nearly half a million.

The yawning democratic deficit at council level

The gap is even larger at local council level, as this chart of voting by age group and ethnicity from Auckland Council’s 2017 election results shows.

The scale of the wealth transfer from the young to the old is even clearer, once the effects of the housing boom’s increase in net worth over the last 20 years is taken into account. It accelerated dramatically during covid, especially for young renters, as these three charts show. The shift is at least $1 trillion from lower age groups to older age groups in the last 20 years. Here’s the way it changed between 2001 and 2018. It will have worsened since then.

But there is a chance for council elections

The 75% super-majority requirement may block change at the general election level, but the franchise could be lowered to 16 for local elections, as the recent Future of Local Government Review suggested should happen in its draft report. The Local Electoral Act can be changed with a simple majority, unlike the Electoral Act.

Labour’s caucus has yet to express a view on the local vs general ages, but Ardern agreed in the news conference it was possible Parliament could vote differently on local vs general.

So how is the hegemony of older landowners enforced?

The concept of the democratic deficit as a political economy problem was well outlined by the Productivity Commission in its ‘Housing Affordability’ inquiry of 2012, its ‘Using land for housing’ inquiry of 2015 and its ‘Better Urban Planning’ inquiry of 2017. It is summarised here in this February 2020 note: (bolding mine).

“Homeowners have considerable influence in local body elections and are often strongly represented in community consultation processes. Their influence promotes council decisions that restrict urban intensification and the supply of new land for housing.

“By contrast, those bearing the negative outcomes of councils’ planning and funding decisions are not well represented in either community engagement or local elections. People who tend to be underrepresented include those who are younger (particularly those aged under 25), Māori, Pasifika, and renters – groups more likely to suffer from a lack of affordable housing.

“All this is contributing to a democratic deficit, meaning some people’s views and interests are not adequately represented and councils are not being adequately held to account for the impacts of their decisions.” Productivity Commission note

It’s the same at national level

This skewing of the electoral power to those aged over 50 has been reflected repeatedly over the last 10-20 years in the policy choices made via electoral results, and more importantly, by the policy choices not even presented by either of the main parties at elections.

The classic example of that is the Capital Gains Tax, which benefits those owning leveraged residential land at the expense of future and current renters, particularly those with aspirations of ownership. It has been the core point of debate at the 2011, 2014 and 2017 election. Its absence at the 2020 election because Ardern declared in 2019 she would never (in her political lifetime) propose one again, was effectively endorsed by Labour’s election win. The 2017 and 2020 results also reinforced Labour’s policy change to not increasing the age of eligibility for NZ Superannuation.

The electoral mathematics that reward policies aimed at median voters, who are still mostly older suburban and provincial homeowners, have made it impossible to try to either stop the shift of wealth from the young to the old, or to try to reverse it.

The improvement in voting rates is slowly turning the tide, along with the demise of some of those voters, but there are headwinds to that tide, including the increasing tendency of younger residents to give up and migrate permanently in their 20s. That’s at least in part because of high house buying costs, along with the inability to save for a housing deposit because of high rents relative to incomes.

This chart via Infometrics shows an ageing population as the young leave. More than 50,000 residents in their 20s have migrated permanently since the borders opened this year.

Teach it in schools to improve the habit

Lowering the voting age would push back against that outgoing tide, and potentially lift turnout rates permanently as those voters age into their 20s and 30s, as University of Waikato lecturer Nick Munn pointed out in 2020 via The Conversation.

“Importantly for the long-term health of our democracy, once very young voters have voted, they are more likely to continue voting than those who couldn’t until they were 18.

“Lowering the voting age may, in fact, benefit turnout. Voting is a habit which, once formed, is harder to break. If 16-year-olds have the desire but not the opportunity to vote, by the time they can, some percentage of them has become disengaged.” University of Waikato lecturer Nick Munn pointed out in 2020 via The Conversation.

The potential for civics education to involve a ‘real-life’ exercise of training young people to vote while in their last year or two of high school is also appealing.

Although not for all, including the likes of former Auckland Mayoral candidate Leo Molloy, who tweeted the following yesterday (bolding mine).

“My view on 16 y’olds voting, as a father of 5 aged between 15&21, it seems fine at face value however secondary school teachers and university lecturers are invariably quite left leaning and they brainwash kids around social issues which precludes sound rational voting, JMHO.” Malloy via twitter.

That is the real issue here, at least in a perceived sense. Older, richer voters know that widening the franchise to include younger voters and increase the turnout of those who don’t own land would create the risk of policies that reverse the historic shift in wealth from the young to the old.

The old and rich are opting to block the young from voting to reverse the wealth transfer.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week in geo-politics, the global economy and Aotearoa’s political economy, we learned:

* the Government’s RMA replacement will take 10 years and keep distracting us all from the magical thinking of the last 30 years that low taxes and investment co-exist with high population growth; Thursday’s Deep Dive

* a new report showed the big electricity gentailers paid out $3.7b in excess dividendss in the last eight years, starving investment in renewable generation and delaying our emissions reduction; Tuesday’s Deep Dive

* three opinion polls showed National’s lead over Labour narrowing and Christopher Luxon’s personal popularity continuing to plateau as Labour targets him personally;

* TOP proposed an alternative to Three Waters for planning and funding water infrastructure that uses existing structures and avoids balance sheet separation and centralised co-governance; Friday’s Dawn Chorus and,

* China distanced itself from Russia’s invasion of Ukraine by signing up to a G20 communique denouncing an era of war and declaring the use of nuclear weapons inadmissible.

What was in this week’s Hoon

We talked with Dominion Post columnist Josie Pagani about polls showing Labour and the Greens reducing their deficit to National and ACT, along with the plateauing of Christopher Luxon’s personal popularity. We talked with University of Otago Foreign Relations Professor Robert Patman about the Russian-built missiles fired by Ukraine that strayed over the border into Poland, and President Xi Jinping’s hopeful appearance at the G20 and APEC summits. Our apologies, but the promoted appearance of Adam Jasser was a bit too ambitious. We hope to get him back another week.

Peter and I also talked about Elon Musk’s week of chaos at Twitter, the implosion of Sam Bankman-Fried’s FTX and look ahead to the final interest rate decision of the year by the Reserve Bank this coming Wednesday.

Some longer reads and listens for the weekend

Profundities, spookies, feel-goods and curiosities

Have a great Sunday

Mā te wā

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: A report into electricity ‘gentailer’ dividends has again exposed how successive Governments over the last 30 years have prioritised cash extraction from public assets built mostly by post-war generations of taxpayers.

In effect, voters from the 1990s onwards chose big dividends and lower debt for now over investing in future renewable generation that would have reduced climate emissions and costs for consumers of tomorrow.

Ultimately, land-owning median voters and the politicians that represented them chose over the last decade in particular not to invest for the future, and instead chose lower Budget deficits and (therefore) lower interest rates. That made political and personal financial sense because lower interest rates boost the leveraged value of residential land, and those gains are tax-free.

The costs of those decisions are landing now on today’s renters and will increase the climate costs of future Governments and consumers. It is a silent and massive theft from the future that is now embedded in household balance sheets to the tune of $2.4 trillion, and will come home to roost in the form of tens of billions in emissions credit costs, climate disaster and mitigation costs, and health, education and other costs.

All because our political economy is captured by power of massively leveraged and tax-free household wealth driven by real estate, banking and electricity industrial complexes that argue any investment in future supply of infrastructure for homes and electricity will put up interest rates and endanger the scarcity of the housing and power supplies holding up asset values now. It is a classic tragedy of the owners of today’s assets refusing to use surpluses to invest in future generations because they value the present more than the future, and themselves more than their children.

Yet again, the bulk of voters in the last 30 years are choosing to strip mine the assets built for them by their parents, and to hand on polluted and gutted husks of assets that will cost much, much more for their children and grandkids (assuming they still live in Aotearoa) to clean up and live with.

So how did this happen?

Egged on by Treasury’s convenient obsession with keeping public debt down around 20-30% of GDP, National chose to sell shares in the generator/retailers in 2014, in part to reduce public debts built up during the Global Financial Crisis (GFC) and the Christchurch earthquakes. Then both National and Labour were more than happy to accept dividends that were more than net profits from the three ‘gentailers’ the Government still owned 51% stakes in: Meridian, Mercury and Genesis. Contact, also a former state-owned asset, was fully sold and listed in 1999.

This week the CTU, First Union and climate activist group 350 Aotearoa published a 31-page report into the big four ‘gentailers’ profits and dividends since those part-privatisations. It’s called: Generating Scarcity: How the gentailershike electricity prices and halt decarbonisation. The found $8.7 billion in dividends were paid between 2014 and 2021 off $5.35 billion earned in profits, delivering $3.7 billion in excess dividends, including $1.35 billion to the Government through its 51% stakes in Meridian, Mercury and Genesis.

It found the state-controlled gentailers were able to pay out more than they earned because they didn’t invest in new capacity and kept ratcheting up the value of their assets, which meant their even higher debts did not blow out their debt to asset ratios. Falling interest rates for that period also keep interest costs under control, even though debt grew faster than revenues.

How was this possible in a ‘free’ market?

The CTU/First Union/350 Aotearoa reports argue the way the wholesale electricity market has been run has allowed the big four to keep capacity only just ahead of demand. That means that spikes in demand can only be met by expensive gas and coal generation, especially at Huntly. This sets high prices at the margin, which hits those who don’t have long-term contracts with the gentailers, and especially new retailing competitors who rely on buying on the wholesale market, such as Electric Kiwi and Flick Electric.

This report is not the first to argue the big four have successfully used the market to generate super-profits and strangle new supply. The Major Electricity Users’ Group accused the gentailers last year of making $3.5b in super profits, which I wrote an analysis on. Also, the Electricity Authority found last year that Meridian and Contact had done a deal with Rio Tinto to keep the Tiwai Point smelter consuming Manapouri’s electricity at subsidised prices off the market, to ensure the 13% of Aotearoa’s supply wasn’t dumped on at the margins to depress revenues across the market. The EA estimated that move cost consumers $1.6 billion to $2.6 billion over three years. I wrote about that here last year.

The latest report argues the big gentailers have starved the market of new renewable generation to ensure the capacity at the leading edge of the market was the most expensive, being gas and coal. It found that total capacity had stagnated since the 2014 partial privatisations, and the renewable share had not improved much.

The stagnation in supply was despite many forecasts for the need to increase renewable capacity to electrify transport and decarbonise industry within this decade.

Also, a large amount of wind capacity remains consented, but unbuilt.

So what should change?

The report’s authors, First Union researcher Edward Miller and CTU Economist Craig Renney, called on the Government to lodge resolutions at the gentailers’ shareholder meetings to channel profits into new renewable capacity, and use any dividends to buy back gentailer shares. I have included my discussion with them in the podcast above.

They also argued the Government to commit to spending its excess dividends since 2014 of $1.35b on community and household generation, and to levy a windfall tax on the gentailers for their remaining excess dividend ($2.36 billion).

“The government has recently acted on the banking sector, and on petrol companies to ensure that they are delivering better outcomes for New Zealanders. This report demonstrates that there is a pressing need to do this for the electricity sector as well.

“New Zealand now generates more electricity through coal and gas than we did in 2018. Prices for customers are rising, but new renewable electricity generation that might tackle rising bills and our climate commitments has been missing in action”.

“If the Government wants to honour its commitment to a just transition, it needs to continue to be proactive in holding companies to account.” CTU Economist Craig Renney

Government lukewarm at best on reform

Finance Minister Grant Robertson told me yesterday in the post-Cabinet news conference he would read the CTU-FIRST Union-350 Aotearoa report into power company excess dividends reducing renewable investment, but he didn’t see any major reasons for electricity industry reforms.

He pointed to household electricity prices rising less than inflation in recent years and recently announced plans beyond the big gentailers for new generation capacity as reasons to suggest the current market was working. My questions and his answers are in the audio of the podcast above.

But consumers have a different view

Consumer Advocacy Council chairperson Deborah Hart said of the report that it reinforced views of a market that was not working well for consumers. She pointed to research the Council had commissioned showed 55% of consumers were often only heating the room they were in and 46% reported that they often put on extra clothes to stay warm.

The research found customers had less trust that their electricity providers would provide them with value for money than they had in banks, telcos or Kiwisaver providers to do the same, she said.

More than a third of the 1441 people surveyed reported frequently not putting on heaters over the past year to save money.

Meridian was quoted as disputing the reporting, arguing that real electricity generation prices had fallen in real terms since 2013. Contact said it had launched plans to spend $1b extra on generation.

More coal being burned

One result of the drought in renewable capacity investment and a downturn in gas production has been a five-fold increase in coal burning at Huntly over the last four years, with more than a million tonnes of low-grade high emissions coal from Indonesia now being imported every year.

It is worth noting that for the gentailers, keeping coal and gas as part of our energy mix is a crucial part of the business strategy for keeping profits high. Spot prices on our wholesale energy market are determined by the last form of generation to bid into the market. Renney and Miller.

One way the gentailers are able to support paying higher dividends than profits booked is their ability to upgrade their asset values to ensure their gearing does not rise too much.

Asset revaluations now account for 56% of the fixed assets held by the three state-controlled gentailers.

Excess dividend distribution has starved the network of new renewable generation, keeping the high-cost high-emissions coal and gas industries on life support while pushing up prices for residential users and redoubling profits and shareholder dividends. Perversely, high prices have sustained the constant cycle of asset revaluation that has offset the impact of excess dividend distribution on the gentailers’ accounts, preventing their book value from plummeting.

What we are seeing here is asset-stripping that delivers disproportionate benefits to a privileged few at the cost of residential consumers and global heating. It's doubly ironic that this is possible because of the investments made over decades by the taxpayer, yet it's the poorest New Zealanders who are paying the price in higher energy prices. Its beyond time to deliver change - its time for action. Miller and Renney

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: This week in geo-politics, the global economy and Aotearoa’s political economy, we learned:

* Te Putea Matua (The Reserve Bank) found in its review of its own performance over the last five years it complied with its own act couldn’t have done much different to stop inflation jumping to 7% or house prices surging 45% in 18 months;

* The Opposition was “shocked and appalled” at the reappointment of Adrian Orr as Reserve Bank Governor for another five years, saying it would launch an independent inquiry into the central bank’s actions over covid if it was elected next year;

* PM Jacinda Ardern criticised bank profits as too high for them to keep their social licenses, but did not support a windfall profits tax or a markets study;

* Energy Minister Megan Woods delayed forcing fuel companies to mix in biodiesel to reduce emissions by a year to avoid increasing diesel costs by as much as 10c/litre; and,

* US inflation was slower-than-expected in October, amplifying hopes global interest rates won’t have to rise so much to control inflation, which unleashed stock and bond market rallies, which makes mortgage rate hikes here less likely for now.

What was in this week’s hoon

We talked with Oil Change International’s Global Campaigns Manager David Tong from Sharm-el-sheikh about progress at COP27 and McClatchy investigative journalist David Wieder from Miami about better-than-expected results for Democrats in mid-term elections and worse-than-expected results for candidates backed by Donald Trump.

We also talked about:

* Adrian Orr’s contested reappointment;

* The collapse of crypto-currency exchange FTX after its founder Sam Bankman-Fried failed to repay depositors with the token he created and then borrowed off them; and,

* Elon Musk’s tumultuous week in charge of Twitter, including warnings of bankruptcy and suggestions he would take it behind a paywall.

Other places I appeared this week

I was on RNZ’s Morning Report on Friday to talk about the Reserve Bank’s review.

I was on 1News talking about bank profits and a windfall tax on Tuesday.

Ka kite ano

Bernard

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe

TLDR: Te Pūtea Matua (RBNZ) ploughed ahead this week with its own review of its own performance over the last five years, rumbling over the top of extraordinary criticism from former Reserve Bankers and the Opposition alike to find it largely did what it was it was supposed to do.

The Reserve Bank published 122 pages of self-reflection and analysis to show it mostly got its monetary policy right between 2017 and 2022, along with 24 pages of reviews of the review from two former central bank policymakers from Australia and Canada respectively. I’ve now read them all and have taken a chance to reflect. The reviews all made sense in a narrow almost legalistic view of the updated Reserve Bank Act and the unprecedented actions taken through 2020 and 2021 by the Reserve Bank and its new Monetary Policy Committee with its expanded remit to support maximum sustainable employment.

The review all reads logically and clearly, and despite what was alleged beforehand, it’s no whitewash. But it does leave several areas only lightly addressed, including the removal of LVRs for almost a year. It also does not address the monumental inter-generational shift in wealth from younger renters to older property owners caused in 18 months by the combined actions of the Government and the Reserve Bank.

The central bank might argue that preventing a widening of inequality is not it’s job. But that failure to address the elephant in our political economy only deepens the disconnection between the institution that worsened inequality the most in our history, and the people it needs to win back the trust of: the young renters who now see little real future to build secure and healthy families in Aotearoa.

This chart below was included in the review, but there is no acknowledgement of the shock of 2020 and 2021 in wellbeing and social stability, other that to say the Reserve Bank knew it has to use the ‘wealth effect’ to boost the economy and that growing inequality had been one of the reasons over the last five years for falling structural interest rates. But that’s the extent of it.

For me, this is the fundamental failure of this review and, ultimately, of the Reserve Bank and Government actions through covid. They knew that their ‘least regrets’ policies of money printing, relaxed lending rules and subsidised lending for banks would boost house prices substantially and Finance Minister Grant Robertson was advised it would widen inequality. But they went ahead anyway and didn’t understand just how explosive that would be, and then when it happened, have not addressed it as either a problem or something that should never be allowed to happen again.

In my view, this review failed to address the elephant in our political economy, and in doing so, has left open the risk it uses those same extraordinary tools again to achieve its monetary policy goals. It also fails to acknowledge that using those tools without the express permission of the public at large through both sides of Parliament has eroded the Reserve Bank’s social license. The extreme threat and speed of covid made that request for permission impossible, but there was an opportunity with this review to at least address it, if not talk about the need for someone else to.

There’s a saying the likes of Uber and Facebook used in their pirate-like growth phases: “It’s easier to ask forgiveness than it is to get permission.” During covid, neither the Finance Minister or the Reserve Bank Governor were able or chose to ask the public or Parliament for permission, and they appear unable and unwilling now to ask for forgiveness.

They lit the fuse on a bigger-than-expected bomb

About a decade ago I started half-joking that we didn’t have a real economy, we had a housing market with bits tacked on. It’s a slightly rude thing to say about a modern economy, even a small one without much manufacturing and without deep connections to the global economy. I used to say it to make a point and to provoke a discussion, but it felt more and more true as time went on.

But I’m not the only one to know that our inelastic housing supply combined with the inherent advantages of tax-free and leveraged capital gains mean that any increase in demand from population growth or lower interest rates would have a disproportionate effect on house prices. The Reserve Bank and Treasury had researched and written for over a decade that supply constraints and the lack of a capital gains tax meant that any increase in demand turned into super-heated gains in prices. That’s why the Reserve Bank eventually had to impose and then tighten its Loan to Value Ratio (LVR) restrictions from 2013 onwards.

So when the Reserve Bank decided it needed to stimulate massively, it reached for the ‘wealth effect’ lever knowing it would have some sort of impact. It was advised it would increase house prices dramatically, but it could not have imagined the combination of $55b of money printing, the removal of the LVRs and then $16.4b of subsidised lending to banks would increase house prices 45% in 18 months.

It also knew that the house price inflation over the previous 20 years had already skewed wealth in Aotearoa away from young renters, Māori and Pasifika to older, home-owning Pakeha. It knew its actions would worsen this.

The covid response made this wealth shift worse

The review does not touch on this or the effects on the trust the Reserve Bank requires of the public to do its job. Trust is not only about credibility of actions, but of intent and fairness. If the public don’t believe in the Reserve Bank’s ability to keep inflation low and the financial system stable, then the currency, the financial system and the economy generally is vulnerable to instability. If the public believes the Reserve Bank doesn’t care about the effects on wealth and future for young renters, that will undermine trust too.

One symptom of that is dropped quietly into page 99 of the review (bolding mine):

“A survey recently commissioned by the Reserve Bank also raised questions about the likelihood of inflation returning to the target band by 2024. The survey (from a representative sample of 1,000 people) showed that the majority had little or no confidence in the Reserve Bank’s ability to bring inflation within the target band by 2024.” Reserve Bank review (page 99)

The rights and wrongs unpacked

The review does admit mistakes, including:

* the Reserve Bank should have stopped money printing earlier than mid-2021 and started rate hikes earlier than October 2021;

* it should have allowed more flexibility to stop or slow down the Funding for Lending Programme of cheap lending to banks; and,

* it could have understood more clearly just how quickly and effective the wage subsidy stimulus would be for the economy.

However, the bank’s clear view is that it could not have responded that much differently, and even if it had done the tweaks suggested above, it would only have dragged inflation’s peak down into the 6% range, rather than the 7% experienced by mid-2022. It even went as far as saying that keeping inflation within the target band of 1-3% now would have required perfect foresight and an OCR in 2020 of 7%.

Here’s the section of the news conference with the briefing where I ask Adrian Orr and Chief Economist Paul Conway about the LVRs removal, the wealth effect and social license. In the end Orr acknowledged that in hindsight, the LVRs should not have been removed. This was not addressed in the review.

In essence, the Reserve Bank doesn’t believe it has done much wrong.

In my view, it has defined its own performance review too narrowly and ignored the very real social license and moral hazard issues that have developed globally around the use of monetary policy tools to make the wealthy wealthier, and to protect those values against falling. In doing so, it took the prospect of home ownership out of the realistic reach of renters without wealth parents, and in the last two years, used those tools in a way that created goods, services and rental inflation that also hurts those who rent the most.

The review ignores the accusation that an independently run arm of the state has accidentally on purpose become the servant and protector of the rentier class, seemingly without being accountable to the people through Parliament.

That’s not the accusation levelled by the Opposition, which is focused more on accountability about CPI inflation, but it is one that should also include the Labour Government and Treasury, which has imposed a 30-year long investment drought that led to the ‘sticky’ housing supply situation.

Ka kite ano

Bernard

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TLDR: The age of independence for our Reserve Bank, Te Pūtea Matua, is now over.

In an unprecedented move in the modern history of our political economy, Finance Minister Grant Robertson yesterday defied the publicly stated objections of the Opposition and reappointed Adrian Orr as Reserve Bank Governor for a full second five-year term, effectively destroying what remains of the bank’s record since 1989 of it being seen to be politically independent and above the partisan politics of the day.

That 33-year-long era of neither major political party either publicly attacking the bank or expressing a lack of confidence in its Governor is now over, leaving financial markets to hope that if National-ACT is elected next November that Orr either stands down immediately, or is dismissed and replaced without too much fuss before he has to make any big decisions that clash with the new Government’s views.

The fear is that during a more-than-awkward interregnum while the sitting Government holds an independent review into what it sees as a failing bank and Governor, that some form of economic crisis happens when the monetary and fiscal policy arms of Government are clearly divided and at odds.

The most recent example of that was in Britain last month where a new Prime Minister pursued a reckless and expansionary fiscal policy of unfunded tax cuts while the Bank of England was trying to tighten monetary policy to control inflation. The clash eventually ended when Bank of England Governor Andrew Bailey threatened to stop printing money to buy Government bonds, forcing the ruling Conservative Party to remove Liz Truss as PM. Just last week, Bailey had to publicly deny having effectively staged a coup.

A less modern but more local and pertinent example is the constitutional crisis that happened in Aotearoa on the Monday and Tuesday after the July 14, 1984 landslide election loss of then Prime Minister and Finance Minister Robert Muldoon. Treasury and Reserve Bank officials had to close currency markets on the Monday because Muldoon refused their advice to devalue the currency.

The NZ dollar collapsed on the Tuesday when markets opened without certainty about who was in charge and what would happen. The situation was only resolved when Reserve Bank Governor Spencer Russell and Deputy Governor Roderick Deane approached senior members of Muldoon’s caucus on the Wednesday, who then held an emergency caucus meeting and forced Muldoon to devalue. Those three days of turmoil led to the eventual creation of the 1989 Reserve Bank Act to ensure the Reserve Bank controlled monetary policy, rather than ministers, and that it was seen as politically independent.

Arguably, we were the first in the world to create an independent inflation-targeting central bank that financial markets believed would run monetary policy for economic rather than political purposes.

So what just happened?

Given that history, the very real perception that our Reserve Bank and its Governor should be and are politically independent is foundational to Aotearoa’s modern political economy. Yesterday that perception collapsed under the weight and wear and tear of nearly three years of extraordinary events and stresses in and around Parliament, The Beehive and across the road at Number 2 ,The Terrace.

Finance Minister Grant Robertson yesterday announced he had reappointed Governor Adrian Orr for a full second term that is not due to end until March 2028, well after the potential end of a first term of a National/ACT Government. Robertson said he accepted the unanimous recommendation of the board, but he did it after Willis formally wrote to him calling for only a one-year extension, and only after a fully independent inquiry into the bank’s actions over covid. ACT Leader David Seymour has also objected to Orr’s reappointment.

National began rattling its sabres on this publicly back on July 26 when it called for a fully independent inquiry into monetary policy and Orr’s actions. Here’s my analysis from July 27 of that move.

Really? Is this really that unusual?

To give readers a sense of the strength of language and the unprecedented nature of the political division over Orr’s re-appointment, it’s worth looking at what Luxon and Willis said yesterday after Robertson’s decision, and how it has compared with previous sets of relations and appointments of Reserve Bank Governors. I’ve include full quotes in detail. I’ve also included the audio of the exchanges in the podcast above.

Willis told the Press Gallery in Parliament yesterday that reappointing Orr without doing a truly independent review of his actions in 2020 and 2021 was a "serious mistake."

"In recent years, Adrian Orr as the Chair of the Monetary Policy Committee signed off on an extraordinary programme of money printing and cheap lending that pumped tens of billions of dollars into the economy."

"That programme directly contributed to house prices rising 28% in one year, inflation rising to a 32-year high, and record bank profits. New Zealanders now suffering through a cost of living crisis are owed some answers. Was a more careful monetary policy approach warranted? Has the Bank fulfilled its mandate? Did Orr get it wrong?." Willis in a statement.

She and Luxon went on in the news conference to be even more critical.

“The Government’s refusal to even ask these questions shows contempt for the New Zealand public. It’s not enough for the Minister of Finance to lean on the endorsement of the board he helped appoint. He should have kicked-off a thorough external review to satisfy himself and New Zealanders that the Bank did the best it could have. Instead, he has directly shied away from any semblance of accountability. The ‘ask no questions’ approach is unacceptable." Willis

Willis and Luxon said that if elected in a year's time, they would immediately launch an independent inquiry into the bank's actions, including whether they inflated bank profits. They rejected the legitimacy of an internally sponsored review due on Thursday, including peer review by international experts.

"It's absolutely hypocritical for Jacinda Ardern and Robertson not to have an independent review of the Reserve Bank and monetary policy actions that have contributed to large bank profits. They are actually marking their own homework at this point." Luxon.

‘Include the boost to bank profits in the review’

"I would immediately inquire into the impact monetary policy decision making has head how much has that money printing added to the bottom line for banks? How much have they benefited from really cheap lending? And how much of that is being passed on? "

"It's extraordinary. The funding for lending program means that banks are still accessing really cheap cheap cash. And I think New Zealanders who are paying very high interest rates or are worried about paying very high interest rates would be right to ask is that the right thing to be done." Willis.

Challenged on whether the Opposition was endangering the perception the Reserve Bank was independent with such virulent criticism, Luxon said:

"We've been very conscious of our responsibilities here. That's why for months, we've been telegraphing our concerns by saying please do an independent review. We've got questions, New Zealanders have questions, please get them answered. Properly review them." Luxon

Willis said the internal review was unacceptable. Asked if she would accept the review, she said:

"No, we don't think that is independent as the bank has handpicked its own people to do that. It's been done by staff at the Reserve Bank. How fair is it to say to staff at the Reserve Bank: 'Hey, did your boss do a good job? Of course, they're going to have to say yes." Willis.

'Your favourite teacher marking your exams'

I challenged Willis on that, pointing out the peer reviews were from non-Reserve Bank staff, Australian academic Warwick McKibbin and former Bank of Canada Deputy Governor Lawrence Schembri. She rejected that saying:

"It's a bit like saying to someone, look, you mark your own homework, and then pick your favorite teacher to tell you whether or not you've done a good job. And we think a more robust approach is necessary.

"There's been extraordinary decision making. And the past couple of years, the Reserve Bank printed 10s of billions of dollars, had a lending program that made money virtually free for the commercial banks. And all we're saying is, don't you think you should take a look at whether the right decisions have been made here? And Grant Robertson's answers? Nope, I'm perfectly happy. Well, he may be perfectly happy with the cost of living crisis, massive unsustainable house price inflation and record profit making by the banks, but we're not." Willis

'Should have been just a one-year extension'

Luxon also criticised the Government's decision to reappoint for five years, rather than one year, which would have allowed a National-ACT Government to appoint a compatible Governor.

"I don't agree with what Grant Robertson has done today in appointing a Reserve Bank governor for a period of five years, when the convention was well established under Bill English that you extend someone for a year, and then let a new government decide whether they have confidence or not have confidence in the Reserve Bank.

"We're quite shocked by it to be honest with you, because our view has been very clear and Nicola expressed that. I thought incredibly well in her letter to Grant Robertson saying, Hey, listen, we think it's appropriate that you follow convention, which would be to appoint for a year, and so we can get through the election period of time.

"The bigger issue is the government is not taking accountability or responsibility for its actions that has created the environment where banks have been able to make large profits. And that's why we say we need an independent review. We wanted that review before the appointment of Adrian Orr because we actually think there was monetary policy decisions, government spending decisions that have contributed to an environment where there has been massive asset price inflation, and banks have made big profits." Luxon

So is National justified in blowing up independence?

One challenge to the idea that the era of independence is now over is to say this is just a rogue Opposition Leader and Finance Spokesperson breaking a 33-year bipartisan approach to not singling out the bank or its Governor for such specific and personal criticism. Essentially, the criticism would be that National has recklessly broken the pact for short-term and selfish political purposes.

The problem for the Reserve Bank as an institution and the Labour Government is that their approach and actions since covid were far from normal, or at arms-length, and often by necessity.

Take for example, the multiple letters of permission and memorandums of understanding jointly signed by Orr and Robertson during and since the first lockdown started on March 26, 2020, including:

* the permission for the Reserve Bank to launch and expand its Large Scale Asset Programme (LSAP) to buy up to $100b of Government bonds to lower long term mortgage rates;

* the Government’s indemnity for Reserve Bank losses on that programme, which by the way the Reserve Bank of Australia did not get from its Government;

* the Government’s agreement to the Reserve Bank’s April 2020 removal of LVRs, which was a step other central banks did not take; and,

* the Reserve Bank’s creation of a Funding for Lending Programme (FLP) of cheap lending for banks in December 2020 that is still open until the end of this year and has grown to $16.4b.

It was relatively easy for the Reserve Bank to remain independent when it only had one tool for managing monetary policy, the OCR, and its regulation of banks (and now insurers) was relatively uncontroversial. In essence, the Reserve Bank was ‘only’ running the economy in a politically neutral way that did not redistribute income or wealth, or obviously ‘punish’ or hurt particular parts of society or groups of voters. That is arguable, given the pain workers had to take in the early 1990s to beat down inflation, but it was at least a bi-partisan agreement and never contested in public by either the Government of the day or the leaders of the Opposition.

Central banks can’t be independent any more

But that simplicity started dissolving in 2013 when then-Governor Graeme Wheeler introduced the Loan to Value Restrictions, which effectively discriminated against first home buyers and were eventually used to target rental property investors as well.

Where once the central bank could at least argue credibly that its decisions were not discriminating against one group in society over another, the LVRs immediately became a political issue. The then-National Government of PMs John Key and Bill English, who appointed Wheeler, begrudgingly approved of the first version of LVRs, but behind the scenes there was plenty of argy bargy. The Beehive felt blindsided and pushed back in 2017 when the Reserve Bank also wanted to impose debt to income multiple controls.

In the end, English blocked the DTI plan and decided not to reappoint Wheeler for a second term, who was succeeded by a ‘place-holder’ interim Governor Grant Spencer, who, by the way, loosened the LVRs during his short time in charge. But English never criticised Wheeler in public and Robertson was also wary in public of ‘playing the man’ by criticising Wheeler, albeit he was critical of the LVRs.

Luxon interpreted English’s decision to appoint Spencer as an interim Governor for a ‘caretaker’ period as a ‘convention’, but in reality, if English had wanted to reappoint Wheeler he could have. It’s clear from these Cabinet papers that English and Key had decided as early as August 2016 not to reappoint Wheeler for a new term starting in September 2017, right at the same time as the election. But the appointment timetables were engineered to ensure a caretaker. The excuse of a ‘caretaker’ period was easy to fall back on in February when the final decision was made, but it would have been much tougher if Key and English were happy to reappoint Wheeler. Even by then, the role was beginning to become more political.

Monetary policy made one class of NZers $1 trillion richer

By early 2020 when the prospect of near-zero percent interest rates beckoned and the Reserve Bank was looking at its options for alternative monetary policy tools, it was becoming clearer that monetary policy and prudential policy decisions were becoming much more political.

Money printing exercises in the United States in particular were seen enriching those with assets and widening inequality, but those debates never took place here. The assumption was that these alternative tools would be ‘distributionally neutral’, which is true between home-owners, but not between home-owners and renters. We knew that money printing worked as a monetary policy tool by making the wealthy wealthier and hoping they’d spend some of their ‘wealth effect’ to boost the economy.

The Reserve Bank wasn’t just doing monetary policy and prudential policy. It was doing redistributional and social policy, and not in a good way.

The $55b of money printing, the removal of the LVRs and the creation of the FLP combined with existing housing shortages and existing tax advantages to thrust house prices 45% higher in 18 months and wipe out another generation of renters hopes for the home ownership they know they need to build healthy and secure futures for their kids. The Reserve Bank wasn’t just doing monetary policy and prudential policy. It was doing redistributional and social policy, and not in a good way.

The lack of self-awareness or contrition was the final straw

The Reserve Bank’s decisions essentially added $1 trillion to the wealth of home-owning households and it was clear in public to everyone except the Reserve Bank, Treasury and the Finance Minister’s office.

The repeated denials that anything much had changed or was wrong became laughable. A range of Treasury and Reserve Bank papers even went so far as to say it was not clear that Quantitative Easing had widened inequality, even though both Robertson and Orr were advised in those frantic days at the beginning of covid that QE would make the wealth much wealthier.

When a supposedly independent financial institution works hand in glove with a politician to change the wealth distribution of a nation AND fails to achieve its one clear legislated target, then it has a social license and a credibility problem.

The refusal of both Adrian Orr and Grant Robertson to acknowledge any mistakes or publicly have any regrets about the wealth redistribution they engineered has been the final straw. The Labour Government’s additional decision to give $20b in cash to businesses during covid, but not to give significant extra cash support to beneficiaries and poorer working families, as recommended by its own Welfare Experts Advisory Group, simply added to the weight on that straw.

Inflation’s breakout to 7% meant there was no way back

The moment it broke in public was earlier this year when inflation refused to cooperate with the plan and blew out to 7.2%. It is not expected to get back down into the legislated and agreed target range of 1-3% for another couple of years.

When a supposedly independent financial institution works hand in glove with a politician to change the wealth distribution of a nation AND fails to achieve its one clear legislated target, then it has a social license and a credibility problem.

The Reserve Bank’s recent annual report and statement of intent don’t even mention the failure to hit the bank’s inflation target. It’s as if it never happened. It also wasn’t mentioned in Robertson’s reappointment letter.

The Opposition’s increasingly alarmed public statements should have been red flags to the board of the Reserve Bank and to Robertson that the perceived independence of the bank was at stake.

Was this inevitable anyway?

But could this fracture in the landscape of our political economy have been avoided?

To be fair to the Reserve Bank and Orr, it was clear by early 2021 that there had been too much stimulus and the rebound was dangerous. The Reserve Bank stopped money printing before other central banks and started hiking interest rates before others (although this makes the continued operation of FLP even more nonsensical).

But by then the horse had bolted and Orr’s ‘no regrets’ approach in public and select committee hearings since then became jarring and abrasive for both the politicians and the Reserve Bank’s grandees, such as Arthur Grimes, Graeme Wheeler and Grant Spencer, who have been shockingly critical in public.

I think the Reserve Bank and Robertson could have retrieved the situation with a lot more humility about what happened, and a franker assessment of what it meant for the Reserve Bank’s future. Apologies matter and help to heal relationships, even if they don’t change the facts on the ground. Simply pointing, Trump-like, and saying black is white and that inequality has not widened, is just asking for trouble. Failing to achieve your core role and then not acknowledging it in public is beyond credible.

Would National have done it differently? Probably not.

Another way to approach this issue is to ask if a National Government and a different Governor would have done it differently and allowed the independence to be maintained.

The slightly awkward thing for National at least (ACT did pipe up at the time), is that it never truly challenged the money printing, the removal of the LVRs and the FLP when the Reserve Bank and Government agreed to launch them in those dark early days of covid.

I doubt a Finance Minister Willis and a different Reserve Bank Governor would have been able to do or have done much different. I think the removal of the LVRs was the outlier that created the most damage, but I doubt Willis would have fought to keep them if a different Governor also wanted to remove them. I also doubt National would have been able to stare down the Reserve Bank in its desire to print money, given the Fed, Bank of Japan and European Central Bank had already being doing it for more than a decade, apparently without too much damage (for asset owners that is). We all know differently now.

So what now?

Our central bank can’t be truly independent any more when it now makes decisions all the time that redistribute income and wealth in such a fundamental way.

That era of Reserve Bank independence effectively ended in those frantic weeks of March and April of 2020. Now we are just keeping the score and waiting to see who has more points at the end.

It would make much more sense to acknowledge that a Finance Minister and a Central Bank Governor should be simpatico enough to work together and we just have to hope we don’t get another Muldoon, and that our other checks and balances help avoid that. The awkwardness of five year terms for Governors and three year terms for Governments always had the capacity for conflict. It’s sort of remarkable this hasn’t happened before. The fact it hadn’t, even when Don Brash worked from 1999 to 2002 with Michael Cullen and Helen Clark, shows how foreign the situation is that we find ourselves in now.

That anomaly of a five-year term for Governor being out of step with the three years for a Government needs to be fixed, potentially by making Reserve Bank Governor’s terms either six years or three years, with a limit of two terms.

Ka kite ano

Bernard

PS: I have decided to open this up immediately for public consumption and sharing for all. Many thanks in advance to paying subscribers, who allow me to do this sort of work in the public interest.

This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit thekaka.substack.com/subscribe