Tuesday, 2 December 2014

Did we move too quickly?

Business Insider Australia put up this fascinating chart yesterday (full piece here).

The gist of the article was that the Fed won't want to repeat the premature policy-tightening mistake made by a range of central banks in 2010/11, including us (briefly and marginally) and the Aussies (for longer, and to a larger extent).

But I was more struck by that little rise in the yellow line at the right of the graph - our most recent tightening moves. They're beginning to look rather anomalous.

I know, hindsight is a wonderful thing, and inflation everywhere has turned out lower than reasonable people would have expected at the time (with the recently plunging oil price adding to the decline). And I've been as surprised as anyone - I also thought the strength of our economy would have led to higher rates of inflation (especially for non-tradables) than have actually occurred.

So I'm not pointing fingers. But on a purely objective basis, knowing where we are now, with a slowing economy and inflation less of a threat than expected, I do wonder whether we've tightened too much, too early.


  1. Donal, I have followed your views for years from when i was a founder director of Money Managers, (until sale of my business way back in y2001).

    Inflation has always appeared to be misunderstood. Rob Muldoon gave a subtle tip back in the early 1980's when he publicly stated that "he was going to purposely "devalue" our currency at the rate of 1% per month."
    What I heard him effectively say was "he was going to create what we could perceive as being 12%pa "INFLATION.!"

    Blue Chip more recently marketed themselves by claiming that houses "double in vale " every 10 years.
    More accurately, they should have stated the fact that "there was double the currency in circulation every 10 years."

    That is the fact that dictates that we need twice as much money to buy a house each year......our money has been halved in it's buying-power as a direct result!

    Could it be equally as true to state that during a GFC (we all know about that?), that there is a lower amount of tax-take, and subsequently a lesser amount paid to the IMF, who in turn then lend back a lesser amount of cents-in-the-dollar with instructions to our Reserve Bank to print lesser amounts of "legal tender" (money) so we then receive 'opinions' that "INFLATION" is lower.

    I do trust that I have explained myself clearly enough on this fact, and certainly look forward to any associated responses?
    I have always suggested that once investors are given the facts, it should help them better to make up their own minds?

    Meantime, most appear to invest on the understanding that things such as houses actually "double in value" every 10 years, instead of understanding the plain fact that really, they are needing to "carry twice the jingle" in their pockets in order to buy the same things (assets)?
    Due to what Mr Muldoon referred to as "devaluing" our currency!
    Michael Donovan

  2. Hi Michael, thanks for the comment, and I hope that your many years of following my views isn't another example of hope triumphing over experience...
    I agree, focussing on pre-inflation numbers can often be misleading, and generally you're better off, when it comes to investments and lots of other contexts, focussing on real, after-inflation outcomes. You're right, too about the inanity of much of the policies in NZ in Muldoon's day. I remember (for example) on my first visit here how inflation was 11% whereas the interest rate on savings accounts was officially limited to 2%. Basically an omnishambles.
    I don't think your IMF/RB/misstated inflation rate suggestion works, though. The IMF doesn't get a set amount of our taxes, they don't instruct our RB how much money to print, and the good folk at Stats NZ keep an accurate track of what inflation is occurring and you can trust what they say (you can always argue about details in corners but essentially they've got good numbers).
    And I agree with your final comment about supposed but often non-existent benefits from "devaluing" or 'debasing" the currency. It didn't work in Muldoon's day, not that that has stopped some politicians running with it more recently.


Hi - sorry about the Captcha step for real people like yourself commenting, it's to baffle the bots