To many, it may look obvious that the central bank quantitative easing programmes launched after the 2008 financial crisis have led to inflation, as money printing inevitably does.
It is just that it has shown up in booming stock markets, high prices for art and collectibles, and surging cryptocurrencies; rather than higher consumer prices, cheap money has led to asset price inflation. In this reading, central banks should reconsider their stimulus policies as they are only delaying and deepening the eventual bust.
Stimulus is also, critics allege, increasing wealth inequality and worsening housing crises: higher asset prices increase the net worth, as measured by market prices, of those who already have substantial wealth while leaving the position of those without assets unchanged.
Similarly, it pushes home ownership further out of the reach of those lacking in savings or inheritances — inflation that shows up in assets but not wages is particularly bad news for affordability.
This is why New Zealand's Government has instructed the country's central bank to consider the effect of its policies on the housing market. The centre-left administration of Jacinda Ardern has said that while the Reserve Bank will remain independent, it will have to take into account the Government's objective of "sustainable house prices", which includes taming investor demand, when making policy decisions.
It is true that a fall in interest rates will increase asset prices, all other things being equal. Lowering the cost of borrowing should make it more attractive to buy long-term assets, such as housing, that bring benefits that can last for decades. Indeed, encouraging investment spending is part of a central bank's motivation for cutting rates.
But to refer to a change in the price of assets relative to everything else as inflation — which means a change in the value of money — is a misnomer. A change in a particular set of prices is not the same as a change in all prices: houses have become relatively more expensive to all other goods and services in the economy, not just the Kiwi dollar.
Engineering deflation in consumer prices to address the particular, idiosyncratic, problems of the housing market would be a serious mistake. Using tighter monetary policy to reduce the price of real estate would also have the effect of reducing workers' wages — a central bank-induced recession would ultimately do little for affordability.
Interest rates cannot be used to solve every problem and central banks have struggled enough to try to hit their existing inflation targets.
As the institution responsible for financial stability in New Zealand, the Reserve Bank should consider whether it has all the necessary "macroprudential" tools to address concerns about the housing market. In November it already announced tighter restrictions on high loan-to-value mortgages. Requiring would-be homeowners to have bigger deposits will do little to address concerns about affordability, however.
Central banks, however, make a convenient scapegoat for politicians who are unwilling to take on the vested interests that can create an artificial scarcity of housing even in a land-rich country such as New Zealand.
Changing regulation and reforming planning law is a more sensible way to address the deficiencies of the housing market than running a monetary policy that would not be justified by the inflation and unemployment data.
To solve New Zealand's housing problems, Ardern's administration will need to look much closer to home.
© Financial Times