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Negative Interest Rates For New Zealand. Desperate Government Knows NIRP Will Increase Inequality.

Craig Hutchinson (context, nuance, free speech, privacy)Sep 6, 2020, 8:58:30 PM

"... lower interest rates inflate asset prices ... Higher house prices, for example, make people feel wealthier, more inclined to spend, which supports the economy." - RBNZ Governor Adrian Orr - 2 Sept. 2020.

In my earlier critique of the government's imminent negative interest rate policy (NIRP) I wrote "NIRP is only proposed ... to create more private debt in order to kick start spending by an already deeply indebted private sector ... the idea is to ... get people spending this new debt on consumption. The risk is people instead use the new debt to bid up asset prices (e.g. property)." I wrote this because encouraging consumption has always been the internal logic behind NIRP. Advocates recognised that asset price inflation was a risk because it both widens the wealth gap and sucks capital from where it needs to go to create jobs; innovation and the productive sector. No matter how misguided an idea, NIRP has always been (at least publicly) about creating jobs. Until now.

The above quote from Adrian Orr epitomises all that is wrong with neoclassical economics, the world of fantasy its adherents live in (more here), and an example of how technocratic exceptionalism has taken over policy. The government and RBNZ know NIRP will lead to asset price inflation. They know asset price inflation widens the wealth gap (see Orr's speech). They don't care. This Labour (only a brand name these days) government is so desperate for inflation they will accept policy that will knowingly and intentionally increase inequality, in order to keep the middle class vote by lying to them. They will accept the wrong type of inflation - asset price inflation - because higher house prices, for example:

make people feel wealthier, more inclined to spend, which supports the economy.

This is just not true. People spend when they feel their income is secure, not when some people - i.e. existing home owners - feel wealthier. Of course they're not actually wealthier, the dollar has just continued its 50 year devaluation, and if they sell they're buying into the same market, so there is no net gain. Orr also underestimates people's intelligence; we know we spend more when the expenditure can be easily replenished. Whether some other people feel wealthier is irrelevant. This is pure metaphysical nonsense and belongs in the twilight zone of religion, not economics, which should be dealing with facts. It also shows in sharp relief how neoclassical economics is out of ideas.

In New Zealand, the only idea mainstream economists have to rescue our failing economy is to indulge in fantasy and make people believe they are wealthier. There is zero acknowledgement that New Zealand already has one of the highest levels of private debt in the world {1}. There is zero evidence that the RBNZ or the government have considered the implications of more household debt. There is zero discussion of the increased risk of deflation because of increased debt (more money is unavailable for consumption because it is needed to repay this new debt). There is zero discussion of the risk of increased interest rates to existing debtors (which counter-intuitively has already happened in other countries were NIRP has been implemented). There is zero discussion of an escape plan. How do you push rates back up without bankrupting existing debtors for example? This is nothing but a Ponzi scheme, and as the saying goes:

You can't taper a Ponzi scheme

The more I look at the implications of NIRP, the more I'm convinced that given New Zealand's existing massive private debt, the moribund global economic outlook, and the record of failure of ZIRP (zero interest rate policy) and NIRP world wide - e.g. Japan, Switzerland, the EU and the US - that this misguided intervention will result in deflation. And then comes years of depression. Take out new debt at your peril.

{1} Private debt (business plus personal/household) in New Zealand is currently about 180% of GDP (here) with a household debt of over half of that (~95% of GDP).

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