Posted 26th November 2001

Brash Losing It
by Alan Marston

New Zealand Reserve Bank governor Don Brash gave a rather curious speech
last week that focused on the dangers of deflation. Deflation is where the
inflation rate goes negative as it did in the Great Depression and is
worrying because people defer buying goods as they will be cheaper tomorrow
- the opposite of what happens in inflation. Deflation, not to be confused
with disinflation where the inflation rate falls, can push a country into a
nasty spiral where postponed spending triggers sinking demand, resulting in
financial distress and layoffs.

Brash is on firm ground academically, professionally and with international
business. However he is on shaky ground in the real world and he knows it.
The theories about inflation being too many buyers chasing too few goods
has so many holes in it economists can't even use it as a theoretical
sieve. Reality is the great teacher, and the reality is people are not
plagued by a tsunami of goods, we are cursed by a monetary system that has
created a mountain of debt on our shoulders. There is too little money, not
too much, and the bleedin government instead of creating more for us, takes
it out of our pockets via tax and ships it overseas. Meanwhile banks are
left unrestrained in debt creation and the attendent new money which they
suddenly own. Its a mess and Brash is floundering in an ancient economic
boat, a leaky boat.

Dr Brash was speaking to managers of small and medium-sized businesses in
Whangarei and attempting to put the previous week's half a percentage point
cut in interest rates into the context of the overall operation of monetary
policy. So why did talk of deflation seem curious? Firstly, the RB has only
just managed to get inflation down under 3%. Secondly, as Dr Brash was at
pains to point out in his Monetary Policy Statement on November 14, the
economy is in rude good health, and that's the only thing that is in good
health. Brilliant Don. Its great having a rudely healthy economy while real
life is a struggle from one day to the next. In normal circumstances,
whatever `normal' means, Don would be looking to screw down the economy by
lifting interest rates. But as he has pointed out, these are not normal
circumstances. Sorry Don, the abnormal is the norm, get used to it, start
some lateral thinking.

The reason Don cut the cash rate, which was quickly followed up by banks
cutting their business and mortgage rates, was entirely due to external
factors - the deteriorating outlook for the economies of our trading
partners. Although international economists have made quite gloomy
forecasts, the RB did not think they were gloomy enough and its forecasts
assumed a particularly rough ride for the international economy. "We see
the real prospect of the economy slowing down quite significantly over the
next year or so," Dr Brash said. However, he does not see it as an imminent
danger here. What a relief ... yeah right.