Bernard Hickey: Inflation regime is our 'cross of gold'

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New Zealand increasingly has our own cross of gold in our now strictly enforced inflation targeting regime in the Reserve Bank. Photo / NZPA
New Zealand increasingly has our own cross of gold in our now strictly enforced inflation targeting regime in the Reserve Bank. Photo / NZPA

In 1896, American politician William Jennings Bryan gave what became known as the "Cross of Gold" speech.

In the speech, which helped win him the Democratic nomination for president, he decried America's fixation with staying on the gold standard.

Back then, financial crises were common and triggered enormous economic disruption.

Wages were slashed, unemployment jumped and poverty increased whenever there was a market slump.

Many, including Bryan, blamed the hard connection between the money supply and the amount of physical gold in America.

The economy appeared hamstrung by the supply of gold. Whenever economic output grew faster than physical gold supplies, the economy juddered to a halt, or worse.

Many compare the Eurozone to the gold standard, in that it is forcing southern European nations to crunch workforces and wages lower to restore competitiveness, rather than let their currencies devalue so inflation can help them out.

New Zealand doesn't have a gold standard, but increasingly we have our own cross of gold in our now strictly enforced inflation targeting regime.

New Reserve Bank governor Graeme Wheeler is an inflation-fighting hawk who is determined to lock inflation down to around 2 per cent, pushing it below the upper end of the 2-to-3 per cent range where it has been for the past decade or so.

This week, Wheeler made few comments about the damaging effects on employment and the current account deficit of a high New Zealand dollar.

His entire focus was keeping inflation down, as his Policy Targets Agreement with Finance Minister Bill English specifies, and as the Reserve Bank Act of 1989 directs.

Markets interpreted his lack of concern about the currency and high unemployment as a hawkish signal that he is not prepared to cut rates to boost the economy.

Wheeler's approach also suggests that he will use the blunt instrument of a higher official cash rate to puncture any housing bubble.

New Zealand's obsession with strict inflation targeting and its hands-off approach to the New Zealand dollar is our own cross of gold on which the economy is being crucified.

Exporters, workers and ultimately the economy are paying for this adherence to the theory that low inflation cures all ills.

Like the rest of the developed world, we've had low inflation for 20 years.

But all it did was encourage a deregulation of the financial system, spark an explosion of debt and unleash floods of hot money around the planet.

It's time to shed this obsession with the magical powers of low inflation and look at other ways to run monetary policy.

As Bryan said: "You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold."

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