Tuesday 25 January 2022

Omicron and 6% Inflation – May The Saints Preserve Us!

Everything Is On The Up-And-Up: Right now, New Zealand is at the pre-crashing the economy stage of the battle against inflation. But, with annual inflation nudging 6 percent, a level New Zealand has not seen for more than a decade, the demands of the neoliberal economists for a series of quite sharp interest rate rises are becoming ever more strident. 

OMICRON HAS ARRIVED and, not unreasonably, its spread will monopolise the attention of our news media for weeks to come. But this latest variant of Covid-19 is very far from the only challenge facing New Zealanders. A highly disruptive economic phenomenon, not seen in this country for a whole generation, is making a disconcerting reappearance. An inflation rate significantly higher than the 1-2 percent per annum tolerated by the Reserve Bank since the late 1980s is threatening to further complicate an already fiendishly complex socio-economic equation.

The eradication of excessive inflation was the most important short-term objective of the neoliberal revolution. Squeezing constant price rises out of the system would be an achievement consumers were bound to notice. Indeed, the restoration of price stability would be presented – and largely accepted – as justification for the many other, often wrenching, upheavals of the reform period.

For the neoliberals, knocking inflation for six came with added benefits. At a stroke, the key justification for cost-of-living adjustments to wage rates would be removed. Back in the days when most wage-workers belonged to a trade union, rapid rises in the cost of goods and services was compensated for with corresponding rises in the cost of labour. This was the “wage-price spiral”, which most economists characterised as the fundamental explanation for inflation becoming economically “entrenched”. Their favourite metaphor was of a dog chasing its own tail.

It was absolutely crucial, they argued, not only to eliminate high inflation, but also to remove high “inflationary expectations” from the minds of wage- and salary-earners. So long as workers believed that prices were bound to rise over the period of their union-negotiated wage agreement, they would not only take care to secure an increase to cover the price rises that had already occurred, but also to secure an additional margin sufficient to cover future increases. Should the employers be prevailed upon to meet their employees’ wage demands, the standard response was to recover the additional wage costs by raising prices. Upwards and upwards inflation spiralled, to the general frustration of the whole population.

Particularly aggrieved were those on fixed incomes: pensions and benefits whose value, in almost every case, was progressively whittled away by excessive inflation rates. Even if adjusted to accommodate historic inflation, pensions and benefits were almost never adjusted to meet future increases in the cost of living. The inevitable loss of purchasing power meant that those on fixed incomes became poorer and poorer.

Not everybody living under high inflation was unhappy. People who borrowed heavily to purchase a house, for example, watched in glee as what had seemed a colossal mortgage continued to shrink, in a relative sense, until, after a few years of high inflation, it was reduced to a mere bagatelle. Thanks to the steady increases in their salaries, paying off the bank got easier and easier. What was not to like?

Plenty, if you were a coupon-clipping investor. If the rate of inflation exceeded the fixed rate of interest on a long-term investment, then your purchasing power was bound to suffer. The sum agreed for making your funds available to the borrower may have seemed generous when originally negotiated, but its value, in real terms, upon maturation could be much less so. Small wonder that the neoliberal economists’ recommended solution for excessive inflation – a sharp increase in the price of money – i.e. high interest rates – could always count on the vociferous support of the rentier class.

Jacking up interest rates, suddenly and substantially, certainly reduces inflation, but only at the deliberately incurred cost of crashing the economy.

Without easy access to credit, marginal businesses falter and fail. Workers are laid off in their thousands, and the consequent, often savage, reduction in overall purchasing power precipitates further waves of business failures and lay-offs. With demand for goods and services plummeting, any attempt to preserve a business’s income-stream by raising prices becomes commercially suicidal.

With unemployment rising steadily (along with the supply of labour) the ability of workers’ unions to extract pay rises from their bosses falls away to nothing. Increasingly, the individual worker’s purchasing power is maintained by his taking on of more and more debt. An indebted worker is a quiescent worker, so the wage-price spiral ceases as abruptly as the effectiveness of the unions which set it in motion. Such inflation as remains in the system now works against the income share of the workforce, who find themselves working longer and harder for what is, in real (i.e. inflation-adjusted) terms – less.

Right now, New Zealand is at the pre-crashing the economy stage of the battle against inflation. But, with annual inflation nudging 6 percent, a level New Zealand has not seen for more than a decade, the demands of the neoliberal economists for a series of quite sharp interest rate rises are becoming ever more strident. They are deeply concerned that the combination of supply-chain interruptions raising demand (and, hence, prices) and a serious labour shortage allowing workers to bid-up their wages, are embedding high inflationary expectations in the nation’s consciousness.

There is a great deal the neoliberal establishment will risk to eradicate those expectations – up to and including deliberately throwing the New Zealand economy into recession. As always, that will be very bad news for most of us, but quite encouraging news for some.

Any significant rise in interest rates will see thousands of mortgage holders default on their loans and lose their homes. The resulting surge in mortgagee sales, by expanding the supply of properties on the market, will precipitate a sharp fall in house prices across New Zealand.

While that is not an outcome likely to recommend itself to older home-owners accustomed to seeing the value of their property going up and up – not down and down – there will be many younger New Zealanders who are willing to admit, quietly and privately: “This anti-inflationary thing – it’s not so bad”.

This essay was originally posted on The Daily Blog of Tuesday, 25 January 2022.


Guerilla Surgeon said...

"With unemployment rising steadily"??? At the moment it seems to be falling. As anyone knows who's tried to book a tradie lately. It's a little unclear whether you mean historically or not, but at the moment unemployment seems to be trending down quite sharply. So where does that leave us? Though personally I think every time Treasury tanks the economy, they should fire 50% of them. :) Particularly those at the top. If they had to suffer the same consequences as the little people, that might concentrate their minds a bit more, considering they spend a lot of their time making predictions that don't come true.

Anonymous said...

What can be said in one paragraph rather than within the verbiage of 10.

If I were asked today to formulate as concisely as possible what was the main cause of the ruinous revolution that swallowed up some 60 million of our people, I could not put it more accurately than to repeat: ‘Men had forgotten God; that is why all this has happened.’
— Aleksandr Solzhenitsyn

Jens Meder said...

Thanks Chris for this truthfully realistic report on our current prospects on reducing inflation.
But raising interest rates need not lead to a serious crash and and massive bankruptcies when mortgage repayment rates will be reduced by spreading them over a longer period -

as I believe was done in Japan over 20 years ago when they had over-invested on credit in automation for which there did not turn out to be the demand they expected at that time.

With reduced mortgage rate repayments over a longer period of time there will be no housing market crash nor mortgagee nor mortgagor bankruptcies, and ultimately the buyer even of an overpriced house will be still more wealthy than the person who invested in nothing.

Guerilla Surgeon said...

" If people become less religious, then society will decay. Crime will skyrocket, violence will rise, and once-civilized life will degenerate into immorality and depravity. It’s an old, widespread notion. And it’s demonstrably false."
Phil Zuckerman

Trev1 said...

The economy and race relations will dominate the 2023 election. Inflation is incredibly destructive, especially for those on low incomes. Bad times ahead.

John Hurley said...

Ashley Church is quite confident immigration puts up house prices; he also says [foreign buyer ban] that this is a ploy and “every thing we know about Jacinda Ardern is that she [pro-immigation/open borders]”.
Ashley Church isn’t racist.

What people don’t realise is that while “we are incredibly selective” [TVNZ – Nigel Latta], immigration is now “the fifth pillar of the open economic model” (something introduced “without much fanfare”), there is also an enormous middle class in India and China. That’s why Australia gets an extra 10 million per decade and NZ’s immigration has been “huge” (Paul Spoonley) for the same reason. Immigration increases demand (“try and get a tradie”)

Go back to the 1980’s and Rogernomics might have worked out better if we had listend to “NZ’s most racist economist” (The Standard).

There is a danger that a sector of the economy is being augmented that is totally reliant on a small domestic economy. Not only do these industries have limited potential for per-capita growth but ‘deriving growth via factor inputs such as labour places pressure on infrastructure such as transport and land supply, and ultimately have a further negative impact on growth (ARC 2005). Finally, as the sector gets larger, it gains in lobbying/political strength and can lobby for immigration regardless if it is the best interests of the economy as a whole. This could be seen in Canada where the development industry has lobbied hard for high sustained immigration levels (Ley and Tutchener 2001).
… and (dodgy) university export education.

He should have been the pro Vice Chancellor on the x10 salary? We may not have needed “protected groups” and protected ideas (Southern/Molyneau/Gower – baby/bath water).

John Hurley said...

Australia has been getting an extra 1million per decade (not 10)

sumsuch said...

Alex Solzh came through a religious experience. Now his ideas are supporting the successor to Stalin. Chekhov's humanism was the way to go. He was lucky to die at 44 or so and not be humiliated in the Soviet Union like Gorky. God and nationalism go together in the Orthodox countries, hence the absolute nonsense from Djokovic's father.

sumsuch said...

Reading again the quote from Solzhynitsyn I can see where he is coming from. Sorry he, like many, glued on to the 'God' part over the best principles god represents. Hence his use in Russian nationalism now and suppression of our best ideals.

Can't not be fond of him, though his sarcasm seemed to imagine his situation was a cliff that couldn't be climbed. Which expressed the situation there but had no reality in the world of ideas. Stalin was a cwnt by all measures, no need to flex endlessly about it.

The only foundation is reality. Anything else sends you off in random directions, always for the benefit of the enemies of reality. The 18th century French philosopher I got my middle name from suggested religion wasn't necessary for a moral society, for which the Victorian author George Borrow in his travels in civil war Spain delivering bibles called him the 'Anti-Christ'. Evangelicals were completely summed up and trashed 150 years ago in George Eliot's 'Silas Marner'. Yet the need to feel right about yourself immediately pushes reality aside endlessly. 40 year of 'meritocracy' thinning the benefits for the people doesn't help.

sumsuch said...

You cut out my story about granma? So, like a good schoolteacher you're conscientiously marking our homework? Hope not -- brain strain. Pass over the regulars like God did the Israelites. I admit it might have been a social media mention.