Two big oceans buttressed the Government’s covid response. One is the Pacific Ocean, that protects New Zealand from all sorts of dangers that other countries face, including viruses. The other, nearly as big, is an ocean of cheap credit and borrowed money.
We live in an age of multiple realities and many truths. The Reserve Bank spends more time talking about climate change and the Treaty than it does about price stability; some people like to say the laws of economics have changed, and reality is an endangered species.
We think some laws don’t change. For example, as Milton Friedman said, ‘inflation is everywhere and always a monetary phenomenon,’ and ‘inflation is caused by too much money chasing after too few goods.’ Friedman got a Nobel Prize for his work on monetary theory.
Printing more money and spending it on things that don’t produce more goods means more money chasing fewer goods. Logically, prices paid for the goods that do exist will be higher.
If the Government borrows, prints, and spends billions of dollars, the effects must be felt somewhere, and New Zealanders are now feeling them everywhere. At the petrol pump where prices are record highs, at the timber yard where construction prices go up monthly, and at the checkout where food seems to go up with every shop.
Altogether, since last March, the Reserve Bank has pumped about $60 billion NZD into the economy. That’s about 12 per cent of GDP. Other things being equal, prices should rise 12 per cent.
Of course, not many other things are equal now. But 4.9 per cent Consumer Price Index inflation and 30 per cent house price inflation show where the money might have gone. Inflation is everywhere and always a monetary phenomenon.
Without this mass money printing the economy would not be at capacity (for now), and the Government’s borrowing of around $50 billion would not seem so cheap. That debt has cushioned the Government’s dithering response. They’ve paid people to stay home.
Treasury says the New Zealand Government pumped out more money than any other country except the U.S. during covid. That was before the latest lockdown started in August. It’s hard to outspend Sleepy Joe, who has taken fiscal stimulus to absurd levels with his $1.3 trillion in stimulus.
The problem is that all this spending didn’t produce much. Every dollar the Government spends without producing anything means the price of everything else gets higher.
Labour had a spending problem before covid and now it’s in overdrive. The Government paid people to stay home during lockdowns. It went on crazy boondoggles. It paid off protestors at Ihumatao. It has a program for Kāinga Ora to borrow $2 billion to bid against private developers. It spent $50 million investigating the Boomer Bike Bridge to Birkenhead that never got built (for the best). It spent $600 thousand on a 30 second ad telling people to save energy, despite record energy prices. In 2017, the Ministry of Education had 2600 bureaucrats for 2550 schools. Now there are 3500 and we don’t know what they do.
All this printing and borrowing means there’s more money circulating, but there are not more goods. More money chasing after the same or fewer goods means inflation. We are now paying for the Government’s covid response in unexpected ways, in nearly every way we spend money.
Then there’s the regulation. ACT’s new bus is causing a splash (please see launch video here, you won’t regret it), but every ACT Board member must go through Anti-Money Laundering approval for it to be bought (thank you if you have donated to ACT lately).
That’s a minor grumble by comparison, though. Builders, developers, teachers, employers, farmers, nearly everyone is spending more and more of their time on compliance activity and less time producing stuff. Fewer goods, more money chasing it, inflation.
Some apologists say it’s wrong to blame the Government for inflation because lots of countries are having the same problems. That’s because they’re all practicing the same silly policies. You can justify any dumb idea with the argument that other people have it worse.
Out here on the frontier of the world, we need to do better than the other guys. We need better than good policy, we need the best. We need to get on top of inflation with a smarter covid response, stricter spending controls, and less spending on bureaucracy. We need policies to stop splashing the cash and produce more goods, or we’ll all be paying at the pump, the aisle, on rent and the mortgage.