As in the previous post, there was something in this bit of the interview where I welcomed the Governor’s comments. He lamented the underinvestment in official economic statistics, that has gone on for decades now, and suggested governments really should do better. And while he noted (fairly) that there is a lot more other data than there used to be, it remains something of an open question (would be interesting to see RB analysis of it) as to whether the Bank and other forecasters have gotten any better at recognising early quite what is going on in the economy and inflation. Perhaps 2020/21 was an unfair test, but we’ve seen a lot of lurches even this year from the MPC. But if the Governor is championing full monthly CPI and HLFS data and more timely GDP data, I can only agree with him.
But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.
There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.
But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.
There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.
Click to view
11.1 per cent isn’t even close to 15 per cent. Why does he just make these things up?
(And a reminder of the graph in this morning’s post: on core inflation (the bit central banks do much about) we were simply middle of the pack in the OECD.
I noted this morning that the LSAP hadn’t come up in that bit of the interview. It did in the fuller interview, and sure enough we get the repeated Orr make-believe blustery arguments. Not only had the Bank’s interventions saved the economy from a “deep recession” (quite how when as the Governor correctly notes the lags in monetary policy are long, and GDP here quickly rebounded after the first lockdown), but the costs (the $11bn or so of losses to the taxpayer) were “more than overwhelmed” by the “net benefits”. The net benefits have never been successfully identified, and the absurd claim needs to be read against the fact that overall Reserve Bank monetary policy calls led to the economy massively overheating, a severe outbreak of core inflation, big redistributions, and then a protracted – if not overly deep – recession to get things back to balance. Whatever the good intentions, there simply were no “net benefits” (probably few gross ones either) and large losses to the taxpayer. But Orr never engages straightforwardly on such issues. (For anyone who listens he cited some IMF work – I picked apart an earlier piece from the IMF on this issue here : the IMF had simply imagined a world (and economy) quite different from what New Zealand actually experienced.)
There were two other interesting lines from Orr.
The first was a bold statement that banks had been making “excessive profits”. Not high, but “excessive”. Quite what basis he as prudential regulator had for that claim isn’t clear, but he has long had it in for the Australian banks. He seems to consider it somehow unfair that the Australian banks are efficient low-cost operators.
And the second was the claim that we are seeing unusual (greater than previously) changes in relative prices globally. Since oil prices were one of those he mentioned, here is a long-term chart
Click to view
The alleged greater volatility isn’t apparent there. Perhaps there is something to the claim more generally (would be interesting to see the analysis and data), but it seems unlikely, and perhaps particularly in the New Zealand context, where one of our most important relative prices is the exchange rate, which has displayed remarkably greater stability in the last decade or more than in the first 25 years after it was floated.
Orr also claimed that inflation itself was going to be more variable, but again it isn’t obvious. There has been a bad outbreak of inflation a few years ago, now brought back under control, but is there really any evidence (beyond the Governor’s desperate desire to talk about climate change) for the proposition, or that it would matter if it were true (headline vs core considerations again)?
Towards the end, Orr was talking up the strength of the Bank, notably the Board (signally underskilled in fact, with a chair reappointed who did/said nothing about the mistakes of recent years) and the MPC (most of whom we never or very rarely hear from, at least one of whom has no relevant qualifications at all). As for the rest of the senior management, those I have anything to do with (several) simply aren’t very impressive (in two cases “not very impressive” is to flatter). Perhaps when standards are that low Orr gets away with the sort of loose language, bluster, and Trumpian-style false claims internally (as well as the intolerance of dissent etc that he is known for). But it shouldn’t be acceptable in such a powerful figure, and if central bank Governors are never going to be some sort of single source of truth, at very least they should (a) prompt one to think, and b) not prompt one to worry that yet another claim just bore little or no relation to reality.
But this is latter day New Zealand.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
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In this speech to The Petersen Institute, Washington October 23rd, Orr compared himself and other policymakers to Kupe, the legendary Polynesian explorer as they ‘navigate their own waters’ in pursuit of “clear goals – primarily focused on achieving and maintaining low and stable inflation”.
However, as is clearly shown by the graph from Orr’s presentation, the RBNZ under-called their inflation projections.
And they did this consistently from 2019 when, in Orr’s own words, they started issuing “modern ‘quantitative’ monetary instruments [which] in the case of New Zealand had not been used before” (also known as ‘spraying money around like a one-armed paperhanger’) to the time inflation peaked in 2023.
Additionally, in his Washington speech, Orr commented, “On a personal note, I often reflect to early 2020 and ask myself the question: if someone offered me a peak of 7.3 per cent inflation and unemployment around three per cent in two years’ time – would I have accepted it? Yes!”
Which leads to a further inference. If in 2020 an inflation peak of 7.3 per cent was something he would have happily accepted, then, by definition, he was clearly expecting more than this.
This being the case, why, as his own graph shows, did the RBNZ publish seven forecasts between 2020 and 2023 showing inflation projections that were lower than 7.3 per cent?
The conclusion a cynic might come to is that Orr knew inflation was going to be greater than the levels the RBNZ was officially forecasting but political expediency in support of Grant Robertson and the Labour Government which appointed him, forbade him from admitting it.
But did he really know? Well it wasn’t rocket science to determine what inflation was going to be. In fact it was easy to work it out, as I said in this letter (published in the NZ Herald in June 2022, before they became terminally woke and stopped printing any opinions that weren’t firmly left of centre).
The long-term trend line for NZ money supply (M3) shows that the current amount in circulation should be NZ$340 billion. The actual amount currently sloshing around in the economy is NZ$390 billion. With NZ$390 billion chasing NZ$340 billion of available goods and services, the price of those goods and services must rise by 15 per cent to soak up the excess cash available.
Fifteen per cent is the amount of domestic inflation that must occur over the next two or three years to make this happen. Throw in another two per cent or three per cent per year of imported inflation, from oil prices, supply chain problems and the Ukraine war effect, and itʼs obvious that NZ must expect inflation to average eight per cent or more over the next two years.
And the reality? In the three years from the end of 2021 to now, NZʼs inflation is a cumulative 18.43 per cent, pretty much exactly what I predicted.
To believe that I could work this out but that Orr, with his degrees in geography and economics, could not, has to be disingenuous to say the least.
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