Bernard Hickey: More money feeds bubble

The money printing by central banks of other nations is dribbling down into our housing market. Photo / File

As the proud father of a 12-year-old girl, I have not been able to avoid the phenomenon of Frozen and that bloody song, Let It Go.

I've found myself humming it watching central banks struggling with dark economic forces. That includes our Reserve Bank.

In the past month, the European Central Bank has announced plans to pump money into the economy by printing up to €1.1 trillion ($1.69t) for bonds. The Bank of Japan ramped up its four-year-old money-printing programme for the fourth time last October to try to reverse decades of deflation.

The People's Bank of China is about to embark on fresh monetary easing after nearly three years of falling producer prices and the US Federal Reserve has just finished its third round of money printing, even though its inflation rate is falling, too.

The Swiss and Danish central banks have cut their deposit rates to -0.75 per cent and -0.5 per cent respectively. That means they are charging other banks to look after their money.

Our Reserve Bank Governor, Graeme Wheeler, pointed out this week that central banks will buy more bonds this year than in any since 2011. All this is driving long-term interest rates to their lowest levels since in 14th-century Europe.

This easy money is flowing through to us as falling fixed mortgage rates and keeping our currency high as European and Japanese investors hunt higher interest rates.

These central banks are trying to pump up their economies using unconventional policies to solve what they think is a conventional problem. Understandably, they worry that falling prices are the result of too much slack in the economy. But what if it is because of "good" deflation caused by a supply shock? That's when prices fall because a new technology makes it more efficient or cheaper to make and sell things.

The idea is that the combination of cheap and powerful mobile phones, the app economy and the globalisation of services could deliver the same supply shock boost to production (and reduction in prices) as the steam engine did in the late 1700s. This would cause structural deflation similar to in the 1800s.

That would mean the central bank money-printing would be a wasted and potentially dangerous effort that pumped up asset prices into bubbles that could burst devastatingly.

New Zealand is facing at least one supply shock-driven deflationary force. The extra oil from America's fracking revolution is cited as one reason for the halving of the oil price late last year. New Zealand also saw a record 50,000 net migrants last year, which is helping to repress wages and prices.

Wheeler is rightly cautious about not pouring fuel on the Auckland property fire with rate cuts. The trouble is other central banks' money printing is dribbling down into our housing market.

Policy-makers will have to work out what is really causing all this deflation. They may have to start humming and let it go, let it go ...