The Governor resigns. Not before time. [Updated]

It was no surprise that news of Alan Bollard’s forthcoming resignation from the job of Reserve Bank Governor was followed almost immediately this morning by calls to “shake up the monetary policy.”

Directly out of the blocks before the starter’s gun was even trousered was Ganesh Nana from BERL, never backwards in coming forwards when it comes to being proved an idiot, who opined that the new governor “needed to be ‘actively involved'’ in all avenues of economic policy setting”—in other words, not just focussing on interests rates as a means by which to attempt to control inflation, Bollard’s replacement should be empowered to pull every lever he can find in the pursuit of every policy objective he (or Mr Nana) might think of.

This was bad enough. What was worse, however, was to hear the response of former Reserve Bank Governor Don Brash to this rank stupidity.  Not what he said about how no foreigners need apply for the forthcoming job.  Sadly, that sort of provincialism is now par for the course in this pathetic authoritarian backwater. (Just ask the receivers of the Crafar farms.)  No, it was how Brash had the boldness to say that monetary policy, when focussed only on” keeping inflation under control” by manipulating interest rates, has “worked very well.”

“Worked very well”?

Yeah right.

'Here we sit in 2012, not half-a-dozen years since an orgy of malinvestment and a world’s record housing bubble was inflated in every developed country by the policies of their central banks—the popping of which in large part caused the depression which we are still enduring—and we have a former central banker telling us that the policy that played a leading part in this disaster (a policy that, in the name of a non-existent price stability, spatchcocks together an unstable mix of rampant monetary inflation with a stuffed-shirt bureaucrat dictating interest rates) has “worked very well.”

What a crock.

That a stuffed-shirt bureaucrat is unable even to do this job well, let alone what Messrs Nana, Hickey, Morgan et al would like them to, should be apparent just from the record. But if you want to see just how far from “on top of things” these central bankers are, , just how far from being “experts” these these desiccated economic dictators are, just read the now-released 2006 transcripts of the US Federal Reserve Open Market Committee, i.e, the shysters who “oversee” the economy. These morons don’t have a clue what they’re doing. They really don’t. It’s just laughable. Page after page of “what bubble?” “aren’t we great!” and “can I get the same retirement plan as Alan.”

Or read Alan Bollard’s own book Crisis, which reveals him and his so-called “experts” permanently engaged in a game of “What the Fuck is Going On Out There?!” If there was one “expert” whose record was exploded by the global financial collapse it was surely Alan Greenspan. And if there was a chook with its head cut off during the global financial crisis, it was Alan Bollard.

The point is not that we need better experts in charge. The point is that the people in this job don’t lead the markets at all. Despite their now-exploded claims to omniscience, they just dictate to markets what they will pay for money while staying inside playing catch-up. As I’ve been at pains to point out here at NOT PC over recent years, it is their attempts to lead the market however that caused and causes such calamities as we are now enduring—and will continue to endure as long as the alleged experts continue to insists that things are “working well” [Brash], or that central-bank-based solutions to recovery can be found and acted on [Bernanke].

Not true. Not possible. As The Privateer says in his latest newsletter [hat tip Louis Boulanger],

“Before even a hint of a genuine recovery can take place, there has to be recognition of what it is that the financial world must recover from. What the financial world must recover from is a system whose vital components - money, prices and interest rates - are all controlled by edict and not by the voluntary interaction of people exchanging goods and services in the marketplace.”

I’m all for “changing the role of the Reserve Bank governor. I’m all for “shaking up the policy settings” of an economic dictator who has no place in a free market.

But what I’d like to do is give him less work, not more.  Radically less work.

And I wouldn’t even mind if it was a foreigner who was paid not to do it.

UPDATE: Libz Propose Winding Down Reserve Bank

The Libertarianz Party is asking John Key to consider postponing and possibly cancelling any replacement for retiring Reserve Bank Governor Alan Bollard, ...

The Gnomes of Canterbury put sophism to the sword

The Gnomes of Canterbury are back, putting economic sophism to the sword.

Brad Taylor,from the University of Canterbury, explains that Alan Bollard Doesn’t Understand Economics.  Some of us, of course, have always suspected that.  But Taylor has him cold:

    “Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been ‘blessed by God sprinkling minerals’ and had handled its economy well. He said New Zealand would do better to make the most of the ‘crumbs that come off the Australian table.’

Responds Taylor to this patronising nonsense:

    Bollard seems to be stuck in a materialist mindset when it comes to economic performance. While resource endowments do matter, assuming that New Zealand’s relative lack of minerals destines those living here to a permanently lower level of income than Australians is absurd. As the Taksforce points out, many high performing countries such as Taiwan and Ireland are extremely resource-poor. Many extremely poor African countries are also very rich in minerals. People become richer when the institutional environment allows them to cooperate for mutual advantage, not when there are lots of shiny things to take out of the ground.
    “New Zealand’s economic stagnation has nothing to do with resource endowments or commodity prices and everything to do with poor institutions.”

Round One to the Gnomes.

And you’ll remember that Paul Walker, also from the University of Canterbury, was last week taking on the Standardistas over their absurd claims that minimum wage laws have no effect on unemployment. In the comments thickets of the Sub-Standard’s posts, Paul explains clearly that they do—that setting labour rates above the market rate will quite obviously leave labour markets unable to clear, which is what the evidence clearly shows.  (Meanwhile his interlocutors do their very best to keep claiming black is white.)

That was Round Two.

And finally, in a series of articles Eric Crampton (also from the University of Canterbury) lays waste to the related and equally ludicrous claims of the Standardistas and other fellow travellers that putting an end to Youth Rates did nothing to affect youth unemployment. For a severe reality check on this absurdity, read Eric on:

• Youth rates
• Youth rates revisited
• Youth rates re-revisited

And check out this graph, which tells most of his story:

I’ll let you guess for yourself when youth rates were abolished.

Looks like three rounds to the New Gnomes of Canterbury. Must be some goddamn strong stuff they put in the water down there!

And by the way, if you find it odd that the likes of Matt McCarten, Laila Harre and John Minto campaigned so hard to put young people out of work, which is what we can see they were doing, then I suggest you check your premises.  The reason they took on Youth Rates as a project once the voters kicked their Alliance party out of Parliament was that they wanted to radicalise a new generation of youngsters—and this was their best way in. The welfare of young people was never on their agenda—if it was they would reverse their campaign now the evidence is in.

But they won’t.  Of course they won’t. They would rather have one-quarter of young people unemployed and blaming capitalism for their plight than see them working productively and getting themselves on a career ladder.

Which tells you precisely what sort of “benefactors of humanity” they really are.

Thank goodness, then, that there are still folk about like the New Gnomes of Canterbury, whose mission it is to puncture the sophisms of the statists.  All power to their arms.

Central bankers: Out there without a clue [updated]

This video of Federal Reserve chairman Ben  Bernanke puts into perspective the recent predictions of of economic recovery made by our own central banker, Alan Bollard.  Frankly my dears, for all the reverence they’re given, these guys don’t have a clue. 

Bob Murphy calls it “The Best Five-Minute-And-Seven-Second Argument Against Giving [Central Bankers] More Power.”  Enjoy.

UPDATE:  To be fair, it’s not just central bankers whose crystal balls need work.  There’s a Prime Minister not a million miles from here who’s similarly bereft.

Same country, different views [update 5]

Alan:

    New Zealand is likely to begin recovering from the global financial crisis ahead of the pack , Reserve Bank Governor Alan Bollard said today. . . “The New Zealand economy has taken knocks, but some form of recovery is now on the horizon."

Bill:

    Speaking at the Herald's Mood of the Boardroom breakfast, Bill English admitted that the current global recession made it difficult to take any long-term economic views with certainty.
    "It's getting a little easier to get a fix on what the picture will be like in a month's time", he said, "but forecasting a year or more out is not so easy.” . . .  English certainly was not about to promise any quick fixes. He described the ten years we face until we achieve fiscal surpluses again as a "demoralising trudge"

Well, they can’t both be right, can they. 

Meanwhile, NZ’s M2 money supply is increasing at a year-on-year rate (as of May) of 10.7%.  We still haven’t learned, have we

UPDATE 1:  Says Bernard to Alan Bollard: “Stop wagging your finger and start hiking”:

    Reserve Bank Governor Alan Bollard has developed a finely tuned style of finger wagging lately. He has wagged his fingers at so many people and in so many directions he risks looking like a man who just waves his hands around a lot and doesn't actually do much. . .
    So what is it Dr Bollard? Should we borrow less and spend less? Or should we borrow more and spend more? Or would you like us to save more and spend less? Or should we do everything at once? Why do you tell us to do one thing with your finger and then do another thing with your OCR?

Here’s what Alan should do.  He should stop wagging his finger around and just resign.  Shut down the Reserve Bank, and step down – and let interest rates be what they will on a genuine free market.  That, dear friends, is what genuine deregulation looks like.  Central Banks: Who Needs Them?

UPDATE 2: I love this comment from a National Business Review reader:

I was optimistic till I heard Mr B says we are out of trouble. This guy couldn't pick last weeks Lotto.

UPDATE 3: If Alan’s relying on the States to pull us out he’d better think again.  Morton Zuckerman at The Wall Street Journal says “The Economy Is Even Worse Than You Think.”  Read the 10 reasons the US is in even more trouble than the 9.5% unemployment rate indicates.

UPDATE 4: Eric Crampton notes a little . . . inconsistency from His Alan-ness:

A week ago the RBNZ berated banks for interest rates being too high; today, Bollard berates consumers for responding to interest rates being too low. Which is it?

Life’s always tough for an economic dictator. 

UPDATE 5: Matt Nolan comments at TVHE [hat tip Anti Dismal]:

When the hell did the Reserve Bank become a central planner? Their mandate is to control medium term inflation, not to decide how national income should be divided.

Give an economic dictator an inch, and he’ll try to take your smile.

Wrong rhyming slang [updated]

A few weeks ago Deborah Hill-Cone mused over “whom leftists would throw their shoes at now Dubya has yahooed back to Texas.” Now she knows: it’s bankers.

Although I bet [Gordon Brown, Barack Obama], Polly Toynbee and all the rest were quite happy to take advantage of the boomtimes when their houses were increasing in value, one can't help but wonder if they are feeling some self-loathing now. When the party stops it is much easier to blame the bankers for getting us drunk than admit we are lushes.

And much easier for big-government worshippers like Polly, Brown and Barack to blame those private bankers who were simply doling out the punch, when the primary cause of the problem was the punch bowl being spiked by big-governments’ central bankers .

UPDATE: To get some idea of the role of central banks in the boom -- which has turned to bust in a big way -- and just how seriously they spiked the punch bowl, consider these three quotes from William Fleckenstein's book Greenspan's Bubbles,

Central bankers like Greenspan [and Bollard] aren't like bankers at all... Central bankers are actually central planners [with all the failures of that breed]. Like bureaucratic leaders of central-planned or command economies, they pick an interest rate to wthin two decimal places that they guess will be the correct one, and then they proceed to cram it down the throat of the banking system.

And there are people who call the failure of The Fed a failure of free markets!

So with what was the punchbowl spiked? What were the central bankers cramming down our throats?

Greenspan erred by continually picking an interest rate that was too low, then he solved the turmoil that resulted from that decision with another period of interest rates that were again too low.

Repeat process until finished, which is what Greenspan did -- and what we're now paying for. The last tranche of easy money that left the Fed was to 'fix' the bursting of the bubble in 2001, and we know where it all ended up ...

We will quote once more an amazing nugget of research from Asha Bangalore, economist at Northern Trust Co.: No less than 40 percent of new jobs since 2001 owe their existence, directly or indirectly, to the real-estate levitation.

Today’s price-fixing by the central bank [update 4]

Over the last few days, every bullfrog and his legrope has been debating the interest rate that Alan Bollard should announce this morning.

At nine o'clock this morning Alan Bollard, government appointee, will stare into the cameras and tell you what he’s decided interest rates should be in this economy for the next quarter, and all everyone wants to talk about is is he going to make history?  Will he fix ‘em at their lowest rate ever?

Doesn't the whole situation strike you as odd?

Everyone's been debating what the government's flunkie is going to do.  Better they'd been debating why we stand for a government flunkie to be setting the most important price in the economy: the price of loanable funds.

Better they'd been debating whether an economy in which the most important price is fixed by a bureaucrat can truly be called a free market.

Better they begin to realise that it was price-fixing of precisely this sort by the world's central bankers that was the primary cause of the whole bloody financial crisis.

Try debating that, while you work out what you're going to with your savings now there's no longer any interest to be earned on them.

UPDATE 1: NEWSFLASH, 9am: The “saviour” of the New Zealand economy licked his finger, stuck it in the wind, and decided to slash the economy’s interest rate by 1.5 percentage points.  Which means the basic nominal interest rate a negative real interest rate. 
    Expect would-be savers, especially those who rely on interest income, to be very concerned about their future.  Expect the pool of real savings to diminish.  Expect the essential liquidation of shaky positions to be postponed, and the malinvestments they represent to continue on consuming real capital, like zombies sucking up the resources needed for recovery. 
    Understand that it is these liquidations and this pool of real savings that are both needed for recovery to happen.  And ask yourself what this latest bout of price fixing will do to assist, or postpone, that recovery. . .

UPDATE 2:  Did someone say “sound money”?  How about we start debating that, especially since it’s so clearly and desperately needed?

UPDATE 3:  Pictured at right is the record of the Reserve Bank’s price-fixing over the last decade, including the latest precipitous fall (pic pinched from Kiwiblog):

UPDATE 4 (11am):  Hmmm, wonder what this does to the NZ dollar?
                              
Wow.  Who would have thunk it.  Real money is leaving the country, to be made up (no doubt) by the stuff that comes out of the Reserve Bank’s basement.

Where's Nanny? The PM says she's an 'urban myth'!

In the Leaders Debate on Monday night, in a rare moment when John Campbell wasn't speaking, John Key pointed out that the government has been "storming through the front door"; Clark challenged him to come up with examples, as if the very idea of this combination of gargoyle and dominatrix was some sort of urban myth (a line promoted by The Double Standard).  The best he could do was to begin a list starting with lightbulbs and ending with showers, and not very much in between.

The reason he was so pissweak? 

Simple.  Because his own party was co-signatory to the worst example of nannying this decade, the anti-smacking law.  Hard to bring that up as an example when you yourself shared responsibility for it.

Because his own party began the anti-tobacco hysteria back in the time of Headmistress Shipley, banning (yes, banning) the magazine 'Cigar Afficianado' because it fell foul of the National Party's line.

Because his own party is going to start DNA testing everyone arrested for an imprisonable offence.

Because his own party wants to confiscate the proceeds of crime from defendants, before their guilt is even proved in a court of law.

Because his own party, especially in the days of Headmistress Shipley, was as big a Nanny as Harridan Helen.

But to call the existence of the Nanny State an urban myth is just breath-taking. 

There she is inspecting school lunchboxes.
Banning smacking.
Telling us not to lie in the sun.
Not to drink more than seven servings.
Not to drive too fast.
Not to drive too often.
Not to smoke at home.
Not to smoke in the car.
Not to smoke in the pub.
Not to smoke at all, really (you getting the message)?

She tells us we may not discipline our children.
We may not let them eat tasty food.
We must pay for hysterical advertising that treats adults like children.
We must not watch advertising that treats us like adults.
We may not drive fast cars in industrial areas at night.
We may not climb tall ladders.
We may not act in ways that Nanny deems "anti-social."
We may not buy vitamins and minerals without a prescription from Nanny.
We may not drink alcohol in public places.
We may not smoke cigarettes at work or in the pub.
We may not smoke marijuana anywhere.
We may not ride a bicycle without a helmet.
We may not walk a poodle without a muzzle.
We may not buy fireworks that go ‘Bang!’
We may not put up bright billboards or sandwich boards around our cities.
We may not cut down trees on our own property.
We may not repair our own property if Nanny says we can't.
We may not plant trees on our own property without Nanny’s approval of the type of tree.
We may not paint our houses in colours of which Nanny disapproves.
We may not build houses at all where Nanny says we can’t.
We may not advertise for young female employees.
We may not open for business on days Nanny specifies.
If we do open for business, we must act as Nanny's unpaid tax collectors.
We may not fire staff who steal from us.
We may not fire staff, whatever their employment contract says.
We must surrender our children to Nanny’s factory schools.
We must pay for teachers that can’t teach and for centres of education that aren’t.
We must believe that Alan Bollard knows what he’s doing.
We must believe that our money is not our own.
We must not call bureaucrats “arseholes.”
We must not offend people paid to boss us around with our money.
We must answer stupid questions when Nanny asks us.
We may not spend our own money in ways of which Nanny disapproves.
We may not defend ourselves against people who try to kill us.
We must pretend that snails are more important than we are.
We must pretend that murderers are people too.
We must apologise to tribalists for things we didn’t do.
We must not offend criminals for things they did do.
We must apologise to conservationists for things we need to do.
We must apologise for success.
We must ignore failure.
We may not build new power stations that actually produce real power.
We must not offend Gaia by driving big cars and enjoying overseas holidays … unless we’re a cabinet minister.
We may not end our own lives when we choose.
We must pay for art we don’t like and TV shows we don’t watch.
We must pay middle class families to become welfare beneficiaries.
We must pay no-hopers to breed.

And Helen Clark says the Nanny State is an urban myth?

Are we all going mad … ?

Is she?

Nanny likes to remind us that we're not here to enjoy ourselves. She is the Puritan described by H. L. Mencken, perennially paranoid that somebody, somewhere, somehow might just be managing to have a good time.

She is everywhere, and she is right here front and centre at this election.

Don't let them tell you she's not.

NB: You know, you can download a poster with most of the above list.  Perhaps you should send a copy to John Key, so he starts trying to cross a few off.

Click on the pic to enlarge, or here for an A3 PDF file [1MB] -- and tell Nanny to go to hell.

Best of NOT PC this week, to 31 October

Another good week here at NOT PC, but sadly another week in which scandal outdid substance on the campaign trail, even as out in the real world the chickens of political economy were vividly coming home to roost. Here are the posts from this blog that rated best over the last seven days:

1. REISMAN: It's Not Laissez Faire, Stupid!
   By far the most popular post was not mine, but my link to George Reisman's outstanding article on the economic crisis:
   The Myth that Laissez Faire Is Responsible for Our Financial Crisis.
   People said, "that's the definitive article on the US economic woes for me, thus far." "Superb." "The greatest economist since Mises strikes again." "WOW! Reisman hits it out of the park!" and "The sad thing is that those who need it most won't read it..." All of these things are true, so don't let that stop you putting it in front of those who need to read it most.
2. Stossel's Politically Incorrect Guide to Politics
   This is making me look lazy. Another post, another set of links, this time to a superb John Stossell television special. Start here: The Politically Incorrect Guide to Politics, Part one.
3. The best garden shed in Hamilton
   Some say that architecture is just for cathedrals and public buildings. Bollocks. Good architecture is for every building, no matter how apparently humble.
4. Greens: Vote for [.........]?
   Why not make up your own Green billboards? I did. They're a lot more honest than the ones asking your vote to impoverish someone else's kids.
5. "So, are you going to vote for yourself this year?"
   Helensville Libertarianz candidate Peter Osborne asks punters the question at the Titirangi markets.
   So, are you? Or are you going to vote to make someone else's kids poorer instead?
6. F*** fireworks fun
   Nanny's war against fun on fireworks night continues apace.
   For years now we've been banned from buying anything that goes BANG!
   And this year we're being all but banned from being able to buy them at all.
7. John Maynard Keynes: The destroyer of monies
   Deborah Hill Cone confesses in this morning's Herald to "swotting up on John Maynard Keynes."
   For Galt's sake woman, why!? You'd be better off using his writing to light this year's bonfire.
8. WSABHD?
   What Should Alan Bollard Have Done? Sure as hell not what he did do. When it's time to stop spending and replenish the pool of real savings, what effect do you think dropping interest rates will have? Answers on a postcard, please.
   

Lots of good reading there -- and let let me leave you with a question: Whom should we string up on our bonfire tomorrow night? Any bright ideas for our guy? Suggestions so far include Helen Clark, John McCain, John Key, John Maynard Keynes (in the future, all arseholes will be called John), Barack Obama (got to be careful about the proximity of burning crosses though), Winston Peters and Alan Greenspan. And depending on how the Wallabies do, there might even be a late call for Dingo Deans. Post your ideas in the comments.

Cheers, and enjoy your weekend,
Peter Cresswell

"Hong Kong solution" to bailouts and deposit insurance

"Free-market capitalism transformed Hong Kong from a poverty-stricken victim of the Second World War to its current prosperous condition," notes D.W. McKenzie in an article 'A Move Towards Market Socialism', and Hong Kong is now, or should be, transforming the argument on bank bailouts and the need -- nay, say supporters, the urgency -- of government-backed deposit insurance to put a halt to bank runs on healthy banks.

None of that destructive nonsense for Hong Kong.  When Hong Kong's Bank of East Asia faced difficulties, notes McKenzie, when depositors began to withdraw money en masse, what happened?  Did the Hong Kong government, what there is of it, move to bail it out or guarantee its deposits No, it didn't.  Instead:

    Hong Kong tycoon Li Ka-Shing began buying up shares. This move by Li Ka-Shing helped restore depositor confidence, and rightly so. The Bank of East Asia is well capitalized and has minimal stakes in Lehman and AIG. Of course, Li Ka-Shing made this move for personal profit, but this did help stabilize the financial situation in the Far East. The Hong Kong approach stands in stark contrast to the Bush administration's new policy.

And to the braindead approach taken by the rest of the western world.

Deposit insurance is a short-term solution to a long-term problem, for which as Li Ka-Shing demonstrates, there are much better alternatives.  For despite the illusion of security cast over such schemes, Government-backed deposit insurance is anything but. 

You see, government-backed deposit insurance, which sets up the taxpayer as the fall-guy for something over which they have no control, is inherently risky.

By offering a direct incentive to depositors to prefer riskier institutions with nose-bleed rates of return over safer institutions with more risk-free rates (confident in the knowledge that the riskier profits, if any, will be privatised while losses will be paid for out taxpayers' life savings) deposit-insurance schemes reward the shakier institutions and penalise responsible ones.

The incentives of such schemes are entirely the wrong way round, and are only exacerbated for depositors by the drop in bank savings rates mandated by Alan Bollard yesterday, giving depositors choosing a home for their savings an even greater incentive to "go risky."

Not something you want to hear if "recovery" is what you're after.  Or if repairing or flushing out unsound banks is your concern. Or if you're trying to restore a "liquidity crisis" engendered by a lack of faith in borrowers' ability to repay their debts, and "uncertainty that the balance sheetsof financial firms are credible" -- which the almost legendary Anna Schwarz points out as the cause of today's "liquidity crisis" -- when you know that the incentives all point towards more risk, not less.

And once you've put deposit insurance in place -- no matter how "temporary" you might think it's going to be -- taking it off is like opening Pandora's Box.  It's like taking off a wage-price freeze: all the "temporary" evils squelched by your scheme leap out, and all you're gonna be left with is hope. 'If that hasn't already been destroyed by then.

So government deposit insurance is not the salve so many think it is.

But, I hear you cry, NZ has no tycoons with the wealth to back up local banks in the manner of Li Ka-Shing!  Then more's the pity for us, I say. 

Have you ever asked yourself why we don't?

UPDATE 1:  ANZ-National Bank has just issued the best statement  of its financial health:

"The bank has announced a profit of $1.16 billion saying its New Zealand arm performed well, benefiting from volatility in the global market."

Good for ANZ-National.  Naturally, the unions are whining.

UPDATE 2:  And it doesn't take long for the "Law of Unintended Consequences" to kick in does it.  What to do you think is the result of the unfortunate conjunction of  taxpayer protection for riskier finance companies and Bollard dropping bank rates?  Surprise, surprise: "Investors are “rushing” to finance companies to invest money."  [Hat tip Visible Hand in Economics]

I think I should take up economic prediction.

WSABHD?

Alan Bollard has just dropped the Reserve Bank's cash rate by a full percentage point.  One whole percentage point.  Think about that while you think about these comments, from Mike Shedlock's Global Economic Trend Analysis:

We are in this mess because the pool of real savings has been depleted and it is time to stop spending and replenish savings.

And these comments from Frank Shostak's article 'Good and Bad Credit':

    Neither the Fed nor the Treasury is a wealth generator: they cannot generate real savings. This in turn means that all the pumping that the Fed has been doing recently cannot increase lending unless the pool of real savings is expanding. On the contrary, the more money the Fed and other central banks are pushing, the more they are diluting the pool of real savings.
    We suggest that decades of reckless monetary policies by the Fed have severely depleted the pool of real savings. More of these same loose policies cannot make the current situation better. On the contrary, such policies only further delay the economic recovery.
    By impoverishing wealth generators, the current policies of the government and the Fed run the risk of converting a short recession into a prolonged and severe slump.

So now you've read those comments, and you've had a chance to think them through, and keeping in mind Henry Hazlitt's "one lesson" -- i.e., that "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups" -- here's a few questions for you to consider:

1. What Should Alan Bollard Have Done (WSABHD)? 
2. And what, in your view, will be the effect of what he has just done on the pool of real savings?
3. What will that do to our chances of real economic recovery?
4. What's the single best way to "unfreeze" the flow of credit (NB: you can cheat on your answer by reading Shostak's answer two-thirds of the way down here).
5. Have central bankers like Alan Bollard and Ben Bernanke learned the correct lesson from the Great Depression?
6. When will they admit they've failed and resign?

Bailouts won't help; cheap credit won't help

A market watcher who gets it right: Dr. Doom: Bailout Won't Help Markets Much - CNBC

    The $700 billion US financial rescue plan might give the market a temporary boost, but  eventually stocks will fall again, Marc Faber, the analyst know as "Dr. Doom," told CNBC.
    Faber, editor & publisher of “The Gloom, Boom & Doom Report”, said he doesn’t believe that the recent efforts to ease the global credit crisis will help.

He's right.  Market need to correct, not to be meddled with.

    “It will work temporarily in the sense that some confidence is coming back into the market,” Faber said about the bailout plan. “First we’ll get the bounce from an oversold level and I suppose afterwards it will drift because the global economy is decelerating at an unprecedented pace, and the governments in the Western world, they try to reignite credit growth, and I think it will fail.”

It will, for sure. Real credit growth comes from the pool of real savings, not from the central bank's credit spigot.  Turning on the central banks' credit spigot doesn't increase that shrinking pool, it further denudes it -- a fact of which Alan Bollard has just shown himself to be utterly ignorant.

    [Faber] didn’t have anything positive to say about the coordinated moves by foreign countries to inject liquidity in their banks.
    “In general, I believe market led solutions are better than government interventions and there is no evidence that government interventions bring an improvement,” he said.

None anywhere.  Not one example.  None at all.

More economic illiteracy in the wild, this time on "inflation" [updated]

"Inflation highest in eighteen years," wails Bernard Hickey and many others, but I'm choosing Hickey to complain about simply because he had the nicest graph.  See:

"Frightening," huh?

So what have I got to complain about? Well, despite Hickey's many virtues, he and his mainstream colleagues still don't have their head around what inflation actually is.  It's not inflation of prices, stupid, it's the injection of currency or credit into an economy by government.  In other words, it's inflation of the money supply.

They're not aware at all of the difference -- the crucial difference between a symptom and its cause -- between the price inflation over which they wring their hands in displeasure, and the monetary inflation* which cause prices to be higher than what they would be otherwise. 

Which means they don't even know that monetary inflation exists, or is the real problem.  Which means they have no idea that the fundamental cause of the world financial crisis (on which they now comment as if with some expertise) was the rampant monetary inflation and artificial credit expansion.  Which means they have no conception that low general price increases in recent years (as measured by the CPI) have obscured the large monetary inflation to which we've been subjected, and are due to real increases in productivity (due in large part to the internet revolution) and the flood of cheaper electronics and ever-cheaper Chinese goods which the monetary inflation has left us unable to enjoy properly.

It was these "deflationary" influences that allowed the rampant monetary inflation of recent years to go unnoticed by all the pundits, even as the huge and destructive credit expansion it represents was out there doing its damage in the wild -- under cover of a phony bureaucratic "price stability" (as I explain here).   Instead of enjoying the fruits of these good things, they've instead allowed governments and their central bankers to distort the whole price system and rort the free market on which we all depend.

You see, far from inflation being "at an 18-year high thanks to historic price rises" as this Herald numb nut describes it, inflation -- real inflation -- has been high for nearly all of those eighteen years.  Take a look at the Reserve Bank's own graph showing the  rate of year-on-year expansion of the various measures of the money supply since 1982:

Frightening, huh? That horizontal line all those coloured lines are hugging is not the 5% line, but the 10% line! (See if you can spot some of our major slowdowns when credit contracted, and that period of huge price inflation in the eighties when  Guess Who was in charge.) 

You might notice while studying the figures that even in April last year M3 was being increased at a year-on-year rate of 14.7%!  And even in August this year (the latest figure the Reserve Bank provides) Notes and Coins were increasing at a rate of 6.6%, M1 at 7.0% and M3 at 7.2% on a year-on-year basis.

If you want inflation then, you sure as hell know where to look -- and it's not in Bernard Hickey's pretty-looking charts.

It's not just frightening because this monetary inflation has been so enormous, and so enormously destructive (see for example this story of how the credit bubble caused the housing bubble, or this story showing how our present problems are due to a Fed-induced distortion in the capital structure -- a capital structure that mainstream commentators don't even know exists!)  but especially frightening because the monetary inflation has been so widely unnoticed.  Instead of being able to enjoy the declining prices due to cheaper electronics and cheaper Chinese goods -- and the increased productivity due to the internet revolution -- the Reserve Bank instead inflated the money supply by injecting currency and credit into the economy, causing the hugely destructive housing bubble and all the various malinvestments around the place that still need to be shaken out.

So let's recap: Put simply, price inflation just measures overall changes in the price of stuff.  This is what gets commentators excited.  Yet monetary inflation, which is generally the cause of the overall rise of the price of that stuff, and much else much more damaging besides, is the bit the commentators ignore.  And for their commentary, which ignores the biggest elephant in the room, they get paid good money.

Go figure.

And capitalism?  Where does that fit in?  Well, you'll note that the Reserve Bank is a government institution.  The country's money supply was nationalised a long time ago -- and the commentators who now blame capitalism for the present crisis never even noticed.

------------------------------------------------------------------------------------------------------------------------

*Explaining monetary inflation, Ludwig von Mises explains it is :

a large increase in the quantity of money in the broader sense that results in a drop in the purchasing power of the monetary unit, falsifies economic calculation and impairs the value of accounting as a means of appraising profits and losses. Inflation affects the various prices, wage rates and interest rates at different times and to different degrees. It thus disarranges consumption, investment, the course of production and the structure of business and industry while increasing the wealth and income of some and decreasing that of others. Inflation does not increase the available consumable wealth. It merely rearranges purchasing power by granting some to those who first receive some of the new quantities of money.

UPDATE: So the take-home message is this:

• if you're a reader of financial journalists and you find them talking about price inflation without talking about monetary inflation, then understand they're not telling you the most important part of the story. Write them a letter and tell them so.
• if you're a financial journalist yourself, then how about you start doing your bleeding job.  Distinguish between price inflation and monetary inflation, and start reporting the extent of the more important of the two. (And who knows, you might eventually come to realise why a rise in oil prices isn't actually "inflationary" at all.)
• if you're one of those "economists" whose job is making predictions -- all of which are almost always wrong -- then instead of just "predicting" what Alan Bollard will do with the OCR, how about working out how much extra credit creation will be going on to make that interest rate work, and explaining the damage it will be doing.  In other words, start doing your fucking job.
• And if you're Alan Bollard, then get a fucking grip, and stop inflating the damn currency.  If you do nothing else (insert obvious jokes here) just do that much.  Or that little.

An apology

I have an apology to make. On July 9 this year I said of Mr Peter Lyons, teacher, that parents of St Peters College students "should be grateful they have such an insightful chap teaching their youngsters." "Thank goodness for good economists like Mr Lyons," I said.

As yesterday's Herald column from Mr Lyons demonstrates however, I was wrong. Horribly wrong. Mr Lyons is not an economist's nutsack. He has in fact bought every pseudo-economic nostrum that the likes of Paul Krugman and Susan St John and all the "failed-policies-of-the-past" crowd have ever served up, fallacies that are best summed up in the title of his piece: 'Free Market Trip to Lower Wage Future.'

Wages are low and prices are high, he says, and all because "In the past few decades New Zealand has embraced the global marketplace with an enthusiasm matched by few other countries." "Kiwis are struggling to own their own homes and pay the weekly bills," he argues, because "We have applied a textbook economic model of capitalism to a real society" -- a "free market model [that] prescribed controlling inflation," "privatisation" and the implementation of "perfect competition" and "unfettered financial markets," based on a model in which "people base economic decisions on full information."

Really? I'm not sure about either you or Maurice Williamson, but I haven't noticed any unbridled cross-spectrum support for privatisation recently. Have you? If you're not sure, just ask David "Telecom" Cunliffe and Michael "Fail Rail" Cullen.

Nor have I noticed a full-blooded drive for free markets. Barely twenty-four months of the past few decades have seen reform that even paid lip service to freer markets, and in the final analysis many of the reforms, including those Mr Lyons criticises, were actually destructive of freer markets and a freer country.

And if our financial markets are so free and "unfettered," as Mr Lyons seems to think, then what's all that stuff that Alan Bollard gets up to all about -- how come we're not free of him? In fact, the very idea of "controlling inflation" through meddling by bureaucrats like Bollard is the very antithesis of an unfettered financial market.

And this notion of "perfect competition": it's not only horribly wrong, but with power given to the likes of Paula Rebstock to enforce the foolish notion -- giving her wholly unchecked power to be judge, jury and executioner over her moral superiors -- it's also horribly destructive, and hardly demonstrative of a free market.

And what of this ridiculous notion that "people base economic decisions on full information"? That's not the argument of genuine free-market economists, who recognise that people always act in a context, but the insistence of the state-worshipping "market-failure" branch of economics begun by Alfred Marshall and embraced by the likes of Paul Krugman and the text-book writers (for more on this particular nonsense see here and here; and more on "market failure" here).

Where, in the New Zealand of today -- a place where politicians are about to embrace a savage fiscal attack on industrial emissions and where talk of toll roads is enough to get everyone hyperventilating -- where, oh where is this free market of which he talks? A more sensible Herald columnist, Fran O'Sullivan, sensibly points out that "As the toll-roads fiasco demonstrates, New Zealand has become an economic cul-de-sac when it comes to the willingness to openly debate policies that are run-of-the-mill as far as most of our trading partners are concerned."

In other words, we're not even as free in our markets as as most of the people overseas with whom we do business, or would like to, and our position in the economic cul-de-sac has come about precisely because of our our unwillingness even to debate policies that are run-of-the-mill as far as most of our trading partners are concerned!

A free market in New Zealand? Never really had one, more's the pity. It's still, like the subtitle of Ayn Rand's best-seller on the subject, An Unknown Ideal.

UPDATE: In response to my claim that "Barely twenty-four months of the past few decades have seen reform that even paid lip service to freer markets ," commenter Stephen says, "That's a meaningless comparison when the quality and rate of that 24 months is taken into account..."

Well, yes and no. Given that Mr Lyons talks about "decades" of "embracing" the free market, at least we do agree he's talking horse shit. But the quality? Really? I've made a brief comment in the comments on that, but the best detailed response can be found here: Lindsay Perigo's overview of it all 'In the Revolution's Twilight' -- a summary of New Zealand's market reforms from one who was at the coal face, countering some U.S. libertarians who believe these reforms represented a veritable revolution, explaining how the various reforms have ultimately failed — and describing the philosophical revolution it will take for liberty to succeed.

I strongly commend it to your attention

Stop playing with Alan Bollard's YoYo

For nearly twenty years the Reserve Bank has pursued a policy of so-called 'price stability' -- setting interest rates at a level they think will keep the 'general level' of prices stable.

It hasn't worked.   There is no such thing as a 'general level' of prices, and the pursuit of general price stability has created just the opposite of stability.

Take the price of the New Zealand dollar. Go on, take a look.   Has this price been stable in recent time?  Not on your life.  In recent times it's been as high as eighty cents against the US dollar (making life difficult for exporters), and as low as sixty-four cents (making it difficult both for importers and for producers reliant on imported factors for their own production).  The YoYo-ing of the NZ dollar does little to help producers plan ahead with confidence, and little to help drive the prosperity of which we're in somewhat short supply.

So as the NZ dollar now starts to slide below seventy cents again, it's clear if we've had price stability anywhere it hasn't been in the price of the NZ dollar.

Let's take another example.  How about the price of borrowed money, so crucially important in driving prosperity -- has this price been stable?  Not half it hasn't. Since 1992, interest rates too have gone up and down like a YoYo -- up to 7.5% and down to 4.5%, up to 10% and back down to 4.5%, and then back up to 9.5%.  Meanwhile mortgages, the price you pay to repay your house, have been down to 6, up to 11.5, down to 6.5, up to 9, down to 6, up to 9.5 ...

So much for the 'price stability' of borrowed money (you can see a graph of the money madness here if you like that sort of thing).  The Reserve Bank's pursuit of the 'price stability' of a nominal 'basket of goods'  -- which is a fiction that mainstream economists use as a proxy for the non-existent 'general price level' -- has led not to rampant instability in the prices that are central to both production and prosperity.

Is this sensible, do you think?

In fact, the Reserve Bank-created YoYo, the result of their gormless fight for a nominal 'price stability,' has created instability in every important aspect of the economy. 

And when you look at some of the biggest ticket items in our own personal 'basket of goods,' which is very real to each of us, we can see that the Reserve Bank's intervention has either made the prices in our own 'basket' either more unstable, or has had no effect at all.

Take house prices, for example.  Would you call them stable?  Not only has the price you would pay for a house gone up and down like a YoYo in the last two decades, so has the price you pay to borrow the money to pay that price.  This instability is almost entirely the result of the Reserve Bank's pursuit of stability.  Go figure.

Take the price we pay to governments both central and local for the job they do in keeping us down.  These have been going up like a rocket in recent years, yet about these the Reserve Bank maintains a monastic silence, while tinkering in other areas to maintain their monetary model.

Take the prices of food and oil.  Have these been stable recently?  Stupid question, of course, but in trying to squelch the effect of these -- something even Alan Bollard should realise is something about which the New Zealand Reserve Bank can do absolutely nothing, and which have no impact on 'inflation' anyway -- Alan Bollard has been very stupid.  His tinkering to bring stability to prices over which he has no control has led to rampant instability in the prices over which he does have some control.

Thank goodness that for all the tinkering to keep prices 'stable,' some real prices are actually falling.  The price of things like cars,computers and clothing -- your basic consumer goods, have mostly been getting cheaper (mostly because of imports from places like Japan and China).  This has helped offset the price rises of the likes of food and oil, but according to the mantra of the Reserve Bank even falling prices are an affront to the grand goal of price stability.

It's just madness, isn't it?  If prices rise for good supply-and-demand reasons, the Reserve Bank moves to squelch these important price signals.  And if prices fall for good production reasons, they move to squelch those boons as well.  We can only 'win' on those rare occasions when increasing production equals increasing shortages.  Dumb, yes?

Fact is, the pursuit of a fictional 'price stability' has led to instability in every important price that you and I pay for goods and services.

No wonder that the real result of of Reserve Bank intervention is not stability, but boom and bust.

Here's my advice for Alan Bollard and his destructive YoYo: just leave us alone.  Or in French, Laissez Nous Faire.

Another interest rate decree set to distort the economy

In less that an hour, Reserve Bank governor Alan Bollard will bring down from the mountain tops his latest decree on the country's interest rates, which he will deliver to us with all the gravity of one who has just been to the mountain tops communing with the economic gods.

He hasn't, of course -- instead, he's been interviewing his calculator.

In his view, and the view of those who support the mainstream economic model on which his pronouncements are based, from his calculator issues forth all the wisdom that the market lacks. According to these mainstream economic models, interest rates can't do their job -- they are governed by irrational "animal spirits" (yes, this is the sort of 'thinking' on which the mainstream economic models are based) -- and they require the likes of Bollard to do the job for them with calculations like this one, in which the interest rate, r=p + 0.5q +0.5 (p-2) +2, and p is defined as the inflation rate over the previous year, and q represents a notional figure based on guessing what 'full output' looks like.

Elegant, huh? The figures '2' appearing there, by the way, indicate the banker's nominal inflation target of two percent.

If you've ever wondered why economies experience severe business cycles -- lurching cyclically from boom to bust, from inflation to stagflation -- then the heart of the answer lies in the failure of this flawed economic model, and the difference between the interest rates brought down from the the mountain (or received from their calculators) by the likes of St Bollard, St Greenspan and St Bernanke, and the 'natural interest rate' that would be set by the market if interest rates and the money supply weren't being meddled with by the likes of these beatified few.

The 'natural' interest rate is not set by central bankers. In fact, it's not set by bankers at all. It's set by the natural time preference for money of numerous individuals, as shown by their spontaneous decisions to save or consume or invest.

Time preference is simple to explain, but profound in its implications. It is simply a measure of how much I prefer present satisfaction to future satisfaction, as demonstrated by my own actions. If I demonstrate by taking out a loan that I prefer $100 dollars now to $110 one year from now, then that suggests a 'natural' interest rate of ten percent, as demonstrated by my own demonstrated time preference. If I find a lender willing to forego his own consumption of that $100 for one year on the basis that he will receive my $110 in a year, then he has demonstrated a similar and reciprocal time preference.

It is on simple decisions such as this on which a rational market is based.

The natural market interest rate is simply the sum of all such preferences shown by borrowers and lenders across all markets, and if coordinated through the voluntary choices and actions of individual actors the result is to provide the necessary constraints and incentives to keep savings in line with investment, and to distribute new resources to future investment projects, based all the time on people's demonstrated willingness to forego present consumption. Left alone, instead of being used to further the political goals given to the world's central banks, interest rates can do their "growth governing" job - if, to stress the point, they are allowed to.

I'll leave it as an exercise for you, the reader, to work out what happens when people's demonstrated willingness to forego present consumption does not match the resources distributed to future investment projects -- which is what happens when interest rates are set by saints bringing down wisdom from the mountain tops instead of by simple market forces.

NB: In fact, I'll only leave it until tomorrow to muse upon the question, since I propose to answer it tomorrow with some rather tasty looking graphs. Keep watching.

UPDATE 1: As you've probably heard if you're reading this now, Bollard's calculator told him to make a cut in interest rates this time, the first interest rate cut in five years [Herald story here]. The NZ dollar had already eased slightly in anticipation...

UPDATE 2:  ... the dollar had eased slightly, but not as quickly as it 'eased down' after forex dealers heard the sound of Bollard's chickens coming home to roost.  Interest rates: they play a huge part in setting our exchange rate; they're the means by which we divide up our income between consumption and investment; they set the levels at which resources are distributed to projects with  a long-term payoff ... and all Bollard's calculator is able to do for him is confirm the failed myth that he is capable of  influencing inflation, without apprising him of the damage he's doing in the process.  [Thanks to Lou at No Minister for the graph.]

Fear & loathing with Alan

Hunter S. Thompson takes a trip to Canberra with Alan Bollard. Armed. And hilarious.

The forecasting delusion

I've posted before on the failure of economic forecasters to do what they purport to do: forecasting the future (see here and here, for recent examples.)  When it comes to most economic predictions about the future, the evidence shows that it's a matter of the blind leading the sightless. 

Just look at the recent evidence gathered by Whangarei commentator Rodney Dickens [What are the economic forecasters up to now? - pdf], which compares predictions-against-performance for the top ten economists surveyed each quarter by the NZ Institute of Economic Research. The average predictions bythe economic forecasters are called the 'consensus forecasts.'

Here's what that 'consensus' predicted would happen with the unemployment rate:
                                    

As Dickens says, "not much use to firms and individuals who make the mistake of trying to use the consensus forecasts for business or investment risk management purposes."  Here's that same 'consensus' trying to predict consumer spending, measured against what actually happened:
                                    

Not a complete dead loss, perhaps, but if you were relying on the "top ten" to help you out in June '02 and June '03 you'd have been in trouble.  Frankly, one can see why some contrarians make money by betting against the forecasters ... except that just occasionally the forecasters are right.

Despite their lack of forecasting success, economists nonetheless persist in making public predictions that are lapped up by media and business.  And many people will have locked themselves into fixed-interest mortgages on the basis of predictions of how interest rates will move, which can be contrasted to what actually happened:
                                            

The phrase "friggin' hopeless" might occur to you about now.  If it did, then think of something stronger because here's what that same "top ten consensus" made of exchange rates, as measured by the Trade Weighted Index (i.e. the weighted value of the NZD against the USD, AUD, Euro, Yen and GBP):
                                              

Not much success there either, huh?

Now, you might object about now that using the 'consensus' prediction here hides the few forecasters who've been successful.  Just to test that particular hypothesis, the chart below shows the range of predictions made by those top ten...
      

Looks lik e that hypothesis can be abandoned too. 

Now, these charts are hardly a compelling argument for the efficacy of economic forecasting.  Of course, Rodney is himself a forecaster --  his newsletter 'What really drives the NZD/USD,' he boasts, "shows that we have a much better understanding of what drives the major cycles in the NZD/USD than all the economists combined"  -- but he's at least aware that the public, that is, you, need to be aware not to take forecasters' predictions as gospel.

Unlike politicians and central planners, who do take these forecasts as gospel (and Alan Bollard, who thinks he writes the gospel) entrepreneurs themselves rely largely on their own independent judgement of what the future holds-- and it's them after all who actually move the economy and drive production.  Entrepreneurs will certainly listen to forecasters, and they definitely don't mind forecasts being taken seriously by the easily led, since it sets up opportunities to take advantage of their poor estimates.  ( What entrepreneurs are often looking for is, as Israel Kirzner explains, "unexploited opportunities for reallocating resources from [low-valued] use to another of higher value [which] offers the opportunity of pure entrepreneurial gain.  A misallocation of resources occurs because, so far, market participants have not noticed the price discrepancy involved.  This price discrepancy presents itself as an opportunity to be exploited by its discoverer.  The most impressive aspect of the market system is the tendency for such opportunities to be discovered.")

Entrepreneurs generally recognise the truth stated by Ludwig von Mises, "that the main task of action is to provide for the events of an uncertain future."  If, for example, the date of booms and busts and the like could be predicted "with apodictic certainty" according to some formula or other, then everyone would act at the same time to make it so.

    In fact, reasonable businessmen are fully aware of the uncertainty of the future. They realize that the economists do not dispense any reliable information about things to come and that all they provide is interpretation of statistical data from the past...   
    If it were possible to calculate the future state of the market, the future would not be uncertain.  There would be neither entrepreneurial loss nor profit.  What people expect from the economists is beyond the power of any mortal man.

The greatest danger of 'the forecasting delusion' is the illusion that "the future is predictable, that some formula could be substituted for the specific understanding which is the essence of entrepreneurial activity, and that familiarity with these formulas could make it possible for [bureaucratic management] to take over the conduct of business."

    The fact that the term 'speculator' is today used only with an opprobrious connotation clearly shows that our contemporaries do not even suspect in what the fundamental problem of action consists.
    Entrepreneurial judgment cannot be bought on the market. The entrepreneurial idea that carries on and brings profit is precisely that idea which did not occur to the majority. It is not correct foresight as such that yields profits, but foresight better than that of the rest.

NB: I can recommend the regular ravings of Rodney Dickens to you, from whom most of the charts above are sourced.  Click here to go straight to his latest Raving. Or click here to enter the 'Literacy Centre,' where you can access all Rodney's past Ravings.

Cullen's budget didn't deliver tax cuts, and MSM finally notices

Sometimes today's mainstream media takes a few days to catch up. 

After Rob Muldoon delivered a budget, all the media would be asking about "fiscal drag" -- the process whereby the state inexorably steals your salary by ensuring that tax thresholds are not adjusted for inflation.  Today's media seems largely to have forgotten about the phenomenon, but we're not all so forgetful.

Two hours after Michael Cullen announced his budget last week, which included all those 'tax cuts' all the media has been talking about, this humble blog pointed out that they weren't tax cuts at all -- in fact as Liberty Scott pointed out that evening, the 'cuts' weren't even sufficient to take account of the increased tax we'd all been paying due to inflation: "at best [they] only half addressed inflation. People are still paying more in real terms in income tax than they were in 2000."  Cullen Really is Still Taxing You More.

As Julian says at Kiwiblog, this was really the main story of Cullen's budget, and it's been missed and ignored by the media -- until now. Almost all the mainstream media swallowed whole the story of tax cuts, but the Business Herald's Fran O'Sullivan finally spotted the scam and exposed it over the weekend -- pointing out, for instance that "those earning more than $80,000 (8 per cent) would basically fund their cut through the fiscal drag effect."

Nice to see the mainstream media spot the obvious, albeit a few days late.

Unfortunately there's one other fallacy they've still yet to puncture, which is "the post-Budget controversy over whether the so-called generosity of Cullen's tax cuts ... will persuade Reserve Bank Governor Alan Bollard against embarking on interest-rate cuts this year" -- a controversy based on the assumption that tax cuts are inflationary.

They're not.  As I've explained before, essentially they just change who gets to spend your money-- you, or the government.  At the visible hand in economics blog they peddle

the common view ... that tax cuts increase inflationary pressure [because] tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.

But as Paul Walker asks, "why does aggregate demand increase? Why does demand change if I spend a dollar rather than the government spending that dollar? ... [T]he real issue isn't aggregate demand but rather how does the government fund its dollar of spending now that it has given me my dollar back."

Frankly, as Phil Rennie points out, the important point to note about about tax cuts in this context  "is that they are actually less inflationary than government spending."  I agree. Eric Crampton explained why a few months ago, and the essential argument still holds:

    Even if you start from Bollard's premises, his worries about tax cuts seem odd. If the government has the money, it either saves it or spends it. If it spends the money, it tends to hire people. Hiring people also requires buying office space to put them in. What have been the two big components of inflation? Wages and non-traded goods (housing/buildings). When government spends money, it spends it in the areas most likely to push prices up.

Just think about all those bureaucrats packed into all those buildings in Wellington, for example, and wonder what that increased demand does to the price of Wellington commercial property. The chaps at The Befuddled Monkey explain this graphically (figures are for the USA):

1. "When government spends money, it spends it in the areas most likely to push prices up.
2. "...a very sizable proportion of New Zealand’s goods are being made in Asian countries (who are essentially exporting deflation).."*
3. Most price inflation occurs in areas of major government meddling, not in those in which meddling is only minor and we're still free to produce.  (Recent price rises in oil and food only make this point more accurate.)

So the moral of the story:

1. Tax cuts good.
2. Government meddling bad.
3. Cullen dishonest.
4. O'Sullivan the only political journalist with nous.
5. Some economists do know what they're talking about -- and the media should talk to them more.
6. Stick with NOT PC -- we'll see you right.

UPDATE: Matt from the Visible Hand in Economics blog objects that it is not "fully representative" to say above that the Visible Hand in Economics blog peddles "the common view ... that tax cuts increase inflationary pressure."   "I don't think that this quote is fully representative of my post," Matt responds:

   In my post I said that if government spending was also cut the tax cuts would not be inflationary. Also I made the case that tax cuts without any change in spending might not be as inflationary as we would expect given the "supply-side" response of tax cuts.
    I think it is more than fair to treat government spending as exogenous as I did [ie., as determined by conditions outside the economy], but I can understand the argument that lower government surpluses will lead to more "fiscal restraint." However, given the lack of fiscal restraint over the last decade is it fair to assume that either Labour or National are really going to hit the brakes on the growth of government?
    Also the "exporting inflation" {sic] argument is an exaggeration. As we increase demand for foreign goods our exchange rate depreciates - increasing the domestic price of foreign goods.
    However, don't get me wrong, I completely agree that government spending is more inflationary than tax cuts. But that wasn't the case I was discussing on the Visible Hand in Economics.

For the record, the paragraph of Matt's from which NOT PC quoted reflects the common Keynesian view, and reads as follows:

The common view I work off when stating that tax cuts increase inflationary pressure is that tax cuts increase “aggregate demand“, which in turn will lead upward pressure on prices, and therefore an upward shift in interest rates.

This aggregating together of consumer demand (in Henry Hazlitt's words "a retrograde step which conceals real relationships and real causation [leading to the erection of] and elaborate structure of fictitious relationships and fictitious causation") conceals three fundamental things that strongly effect the argument in this case:

1. It completely ignores saving rates -- which are generally higher for higher income earners;
2. It completely conceals the distinction between an increased demand for consumer goods (and which particular goods are being demanded) and an increased demand for producer goods (and which particular producer goods are being demanded) and the different effect on production of increased spending on the latter;
3. That government itself is not a producer, it's a consumer ('government investment' is just "a high-toned phrase for inflation or for tax-and-spend give-aways" - ref: Foundation for Economic Education).

In other words, when governments get our money it's mostly poured down an unproductive black hole with too much money chasing too few goods, whereas only some of ours is. 

It also ignores completely the most fundamental point about inflation: that (in the words of Milton Friedman) it is always and everywhere a monetary phenomenon -- inflation is a measure of how much governments and their central banks are inflating the money supply (which is what governments and their central banks tend to do), not a measure of the rise and fall of prices (which is what prices naturally tend to do).

That said, I note that Matt does draw attention to the "supply side" effect of the tax cuts -- although Eric Crampton notes, if instead of making the tax cuts 'progressive' they'd instead "knocked all the rates back somewhat , the supply side action would have been a lot more effective" -- and I take his point completely that "If society really wants lower taxes we could cut spending" (which should really read "we should insist that government spending is cut"), and to expect "fiscal restraint" from either red or blue team is like expecting sartorial restraint from Paris Hilton.