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Friday, October 28, 2005

Robert Jones Makes Sense

Thank God for Sir Robert Jones! If you'd heard him on National Radio after 4pm today, you'd know he'd take issue with me thanking God. I'm really doing that just to annoy him, just in case he happens to pass by this blog - as unlikely as that may seem.

To the point...

He thinks that interest rates ought to have been left alone. That it's none of the Reserve Bank's Governer's business what people spend their money on, and that if Bollard just did nothing the market would be self-correcting, and the type of hand wringing going on now has been going on for the past 150 years if you look back through old newspapers (which he did). Oh, and if we want certainty - lets change over to a Marxist economy and get it over and done with.

What I've never been able to understand, and maybe someone can help me out here, WHY is the antidote to inflation higher interest rates? Hello! My mortgage is suffering serious inflation right now, I have less money to pay the damn thing off faster because all the extra money is going into higher interest. Most of it is fixed (80%), but the rest is floating so that if I had extra money I could park it there and negate my interest. I'm not borrowing more against the value of my house, I don't have a plasma screen tv and don't intend on getting one. Why is the inflation on my mortgage not bothering Bollard???


Posted by Lucia Maria | 10/28/2005 05:30:00 PM


Blogger coge said...

Of course Sir Bob is right, Lucyna.
You can't beat the invisible hand for sorting the economy. Don't leave it to the public service.

The other thing the govt wants to do is lower the exchange rate. This makes perfect sense, but increasing the cash rate has the opposite effect by increasing foreign demand for NZD.

10/28/2005 06:06:00 PM  
Blogger waymad said...

And the bright spot (sez he who's putting this to the test in a few hours) is that your NZ pesos go even further overseas! Whoever said this Gummint didn't look after it's voters? Well, some of them, some of the time...

10/28/2005 06:12:00 PM  
Blogger Cave Pea said...

"What I've never been able to understand, and maybe someone can help me out here, WHY is the antidote to inflation higher interest rates? Hello!"

Inflation is caused by credit expansion, i.e. people borrowing a ton of credit created by banks out of thin air. This extra money in circulation is the reason for inflation.

When the central bank lowers interest rates, people are discouraged from borrowing, bank credit contracts relatively, and rate of inflation lessens.

10/28/2005 06:53:00 PM  
Blogger Cave Pea said...

Er, when the central bank raises interest rates.

Having the central bank leave interest rates alone at this point isn't the solution. The solution is to get rid of the central bank entirely, so the interest rate settles at its natural level.

10/28/2005 06:55:00 PM  
Blogger Colonel Tux said...

I think the point is that hurting mortgage holders will discourage them from spending beyond their means - which means demand pull inflation is less likely to happen.

10/28/2005 08:23:00 PM  
Blogger Antarctic Lemur said...

Hmmm. Who decided "mortgage holders" are spending beyond their means? Surely if they are then they will soon discover the hard way they sholdn't be doing it.

10/28/2005 09:44:00 PM  
Blogger Chefen said...

What makes you think "means" are anything to do with your judgement? :)

10/28/2005 09:48:00 PM  
Blogger Brian S said...

Exactly AL, who decided I am spending beyond my means? And what about government spending? The whole idea of a Reserve Bank is pretty fucked up when you think about it. We don't need no Reserve Bank.

10/28/2005 10:11:00 PM  
Blogger Antarctic Lemur said...

brian s and cave bear - Alan Greenspan used to think that way. And look where he ended up.

10/28/2005 10:39:00 PM  
Blogger Colonel Tux said...

no one has decided your spending beyond your means - its an entirely a matter of personal finance - you've either got it or you don't (money that is - to service debt). Those who think we don't need a reserve bank are welcome to go and play with their monopoly money. I think ppl are under some kind of misguided understanding that it is compulsory for banks to borrow from the rb - they choose to because its the cheapest form of short term debt they can get. Funny that ppl are bitchin about OCR - you can always try raising a loan in overseas currency.

10/28/2005 11:44:00 PM  
Blogger Lucyna said...

Colonel Tux, you said :

no one has decided your spending beyond your means - its an entirely a matter of personal finance - you've either got it or you don't (money that is - to service debt).

Yes, they have. Bollard has decided all those borrowing against houses for whatever reason are spending beyond their means, therefore he's going to stop them by hiking up the interest rates on money that is already borrowed. Never mind that 80% of mortgages in NZ are fixed, therefore not affected in the short term. But by God, if he doesn't see a reduction in mortgage borrowing, he's going to keep hiking up those rates. And why? To keep inflation down.

And this is the bit that I don't get - why is it ok to hike up mortgages, thus massively increasing the cost of living for those who already have loans by more than the current inflation rate, for the reason that inflation is too high?

Let's see, inflation is too high, so let's make it even higher for those people who dare to have mortgages on their homes. Let's force those on the edge to either downgrade (thus further heating up the house market) because they can't afford whatever loan they have, or be forced to exit the housing market altogther, or just suck it up and use all extra money just to pay the interest. It doesn't make any sense. It's like, let's fuck over the middle class some more. People who have their houses paid off aren't affected, it's only small business, and those on variable rates (like me) who might have a portion on variable as a means of offsetting interest. A way of paying off your loan faster, if you have extra money.

And Cave Bear, why exactly is it alright to increase inflation for mortgage holders to somehow keep it down for those without?

And yes, this is incredibly annoying. I want my damn bathroom, which, if I had the extra money I'd paid in interest over the last two years, I would have already been able to pay cash for. Really annoys me.

10/29/2005 06:11:00 PM  
Blogger fm said...

Excellent analysis here by a gifted economics blogger. Australian based, but he comments on regional and international economics. A daily read for me (although I just noticed this post).

10/29/2005 07:49:00 PM  

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