The inflation monster is baaaaaaack

This week New Zealand’s inflation hit a 31-year high after decades when the spectre of relentlessly rising consumer prices seemed to have been conquered forever. What happened can only partly be blamed on domestic issues – a 32 percent rise in the price of fuel, for instance, simply had to be accepted. Although that last issue is, at least in part, an ‘own goal’ given that the neo-liberal ‘reformers’ of the late 1980s abandoned plans to make the country 50-percent self sufficient in petrol, handed much of the infrastructure over to private enterprise at bargain basement prices, and – just this year – that same private enterprise has closed the only refinery in the country. But I digress.

Why has the old twentieth century monster, inflation, suddenly exploded into life? Surely it had been beaten, thrashed to within an inch of its life a generation ago by draconian economic policies that stripped money from the economy and thus, simultaneously, also punished everyday people for existing. The New Zealand generation of the late 1980s and early 1990s went through a lot of pain as a result. But inflation was beaten, meaning the rich weren’t having their wealth eroded. Was it all for nothing?

We can look at proximate causes for today’s blow-out – and economists certainly do. But to me the underlying problem is historical and structural: the 1980s neo-liberal version of capitalism with its hands-off ‘financial markets’ and lack of ability to reign in poor behaviours by key players clearly doesn’t work longer-term. Much of the immediate issue, I think, can be put down to the failure by governments, worldwide, to properly respond to the General Financial Crisis (GFC) over a decade ago. This made it crystal clear that the free-market liberalisations of the early 1980s simply weren’t sustainable. All they did was open the door for behaviours that sent money flooding from the poor to the rich, turned money itself into a tradable commodity – and created fragile constructions of imagined value in the process, which didn’t take much to bring down.

You’d think the world would have learned from the Dutch tulip bubble of the early seventeenth century, where those hoping to profit from the mania ended up trading not actual tulip bulbs, but certificates promising ownership shares in a tulip bulb that they hadn’t seen. These slips of paper, themselves, began gaining value and – well, yah. We know where that went, suddenly, in February 1637.

Photo I took of a tulip in the Keukenhof, 2004 using Fuji ASA200 film.

The GFC of 2007-2010 wasn’t too different. Look at it this way. Money was lent to people who manifestly couldn’t pay it back, and spent by them on disposable commodities. These debts were then treated as a commodity: packaged up and ‘securitised’ for sale to others. This meant they were assigned a value by a credit rating agency as to how likely the debts were to be recovered, giving these securitised ‘products’ a credibility that, in fact, they didn’t have. You get the picture: ‘products’ consisting of consolidated third-party debts were being traded themselves. These trades were well disconnected from the origins of the debts; and as you’d expect, the whole thing fell over like a house of cards.

The world was actually staring down the barrel of a second Great Depression at the time – one that some of the economists I knew feared might last a generation. So what happened? Were the structural issues looked at and fixed? Of course not. The neo-liberal financial system was too heavily embedded into political funding. The attitudes that went with it, in any case, were so normalised that nothing could simply be shut down. Instead governments bought their way out of the looming depression with ‘stimulus packages’ and what was called ‘monetary easing’, ie: printing money. Even New Zealand ended up doing it in the end.

As it happens, printing money is the easy way to stoke inflation, because inflation occurs when the amount of money floating around exceeds the supply of goods. And it can get crazy bad, as in Weimar Germany in the early 1920s where the Weimar government printed money to buy foreign currency with which to pay war reparations, and ended up destroying their economy (technically, these reparations meant that the Allies, who’d been printing money themselves to pay for the war, exported their inflation to Germany). But governments of the 2010s, worldwide, somehow knew better. They were more sophisticated. CPI inflation had been smashed forever. Of course consumer prices aren’t the only prices to worry about, and what actually happened was that this flood of money instead blew up fixed asset prices, as in houses. But CPI inflation had been fixed.

And now? Well, booyah!

The sudden return of CPI inflation is a global phenomenon, but part of the cause in New Zealand is also proximate, following the policy misjudgements of 2020 when the Covid lockdowns were treated as a supply shock and money was poured into economies, in NZ and elsewhere, both by printing it and by slashing the cost of hiring money (interest rates). It was exactly the reverse of what was needed, and here all it did was further blow out house prices, which aren’t part of the CPI. When coupled with the world’s lightest regulatory regimen over the finance sector – the conceptual equivalent of balancing an egg on its head and waiting to see what happens – the result was a flood of cheap money and a huge potential problem should anything go wrong.  

Now the world’s entered a genuine supply shock: but instead of flooding the local economy with money – the usual cure for such shocks – the Reserve Bank’s going to have to throttle it back to keep inflation down. It’ll do that by hiking the wholesale price of renting money (the Official Cash Rate). Last time this happened was in the early 1990s when the Reserve Bank’s attack on structural CPI inflation, coupled with Finance minister Ruth Richardson’s openly punitive fiscal policies, prompted the worst depression in NZ since the 1930s – and this at a time when the rest of the world was booming.

I was working for the Reserve Bank at the time and still recall that period vividly. I had a flatmate who was a Treasury economist: rumours circulated that, after issuing the so-called ‘mother of all budgets’ in 1992, Richardson was going to turn up at the post-budget Treasury bash dressed as the Terminator. You know – everybody who was sick, disabled, or who’d lost their jobs through no fault of their own because of the apocalyptic way the economy had been churned in the previous six or seven years – well, they were now getting what was coming to them, and they deserved it for choosing not to be rich. Punish the people! Punish the people!

When I see politicians today referring the victims of current socio-economic inequities as ‘bottom dwellers’, and when the light down the economic tunnel starts looking more like an oncoming train, I am a bit worried we’re about to go down that track again. This time for a generation. Ouch.

When will Mickey Savage come back to save us?

Copyright © Matthew Wright 2022


19 thoughts on “The inflation monster is baaaaaaack

    1. Unleaded 91 octane petrol here is about $NZ2.60 a litre (about $US 3.90), but it was soaring over $NZ3 a litre for a while. Government slashed its own excise taxes, which helped bring it down.

      Liked by 1 person

  1. Good look at our financial situation which applies equally here in Canada, unfortunately. Our rate just topped 5.7% and looks like it will keep rising with all that entails. The worst part is gasoline which is up 38% year over year and we could be self sufficient except for the controls and the dismantling of our refineries. Throw in the delivery shortages and it is not uncommon to see empty sections of shelves in grocery stores. I feel we are indeed heading for a strange difficult time. Thank you for your article.

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    1. It’s a world issue: ‘globalisation’ has inevitably meant that everybody, more or less, shares the same issues. One of New Zealand’s problems, though, is location. It adds significantly to shipping costs, which makes it difficult for local manufacturing to easily compete with companies in better geographical locations. It’s also contributed to inflation here because shipping costs have blown out through the roof.


  2. The Mother of all Budgets was in 1991. Recall that the excuse for the spending cuts was the small fortune that was used to bail out the BNZ, and that was because it was controlled by Fay Richwhite.


    1. I meant 1991. According to Richardson’s own autobiography (‘Making a difference’) the trigger for that budget reflected significant economic issues, including a double downgrade by Standard & Poors, coupled with a three-year fiscal projection she’d received. In point of fact the BNZ situation was longer-term and Fay Richwhite never had a majority shareholding. The BNZ received two bail-outs, the first in 1989 after declaring a loss of $648 million. This required recapitalisation which was achieved by government under-writing a share issue worth $405 million. This was picked up at 70 cents a share by Capital Markets Equity Ltd (one of Fay Richwhite’s companies, giving them a 13 percent interest in the bank); and by issuing preference shares worth $205 million in capital securities, denominated in US dollars, on the Japanese market.

      Then in 1990, the BNZ’s balance sheet exposures in Australia prompted a requirement for a further $250 million injection, shared between the government and Capital Markets Equity. The bank also had approximately $2.8 billion worth of non-performing loans of which $1.1 billion were thought unrecoverable. Government set up a new company, Adbro, to manage these (81 percent government owned, 19 percent by Fay Richwhite & Co). The government decision to sell the BNZ altogether followed a further loss by the BNZ in 1990-91, at which point the government sold the BNZ to the National Australia Bank for 80 cents a share, totalling $1.48 billion. Total fiscal cost of all this ran to 2.7 percent of government expenditure, which was less (proportionately) than the government had spent the previous time the BNZ bankrupted itself, back in 1895. The Bolger administration of the day declined to launch a parliamentary enquiry into the sale.


  3. The ex and I lost our house in the early 90’s because it was set up as security for his business overdraft. “Of course,” the nice bank manager said, “We’d never call in that security!” I hate to think how many people will lose their houses this time around when stagnant wages and galloping inflation force them to default on their mortgages. Curiously, the current Liberal govt has just made it easier for single mothers etc etc to make a deposit on a house. Of course they won’t default, losing everything. 🙂

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    1. I guess the banks could introduce ‘negative equity’ provisions if things get too bad – this has already been done in the UK and elsewhere, in which the banks basically accept that a house they’ve lent money on now is worth less than the liability on it. One of the main problems for policy-makers is that if half a dozen people end up in trouble with their mortgages, it’s their problem; but if half a million do, it’s the bank’s problem. I know that central banks regularly ‘stress test’ the commercial sector – running scenarios to see what would happen in an economic shock situation. But still, it’s a worry. Here in NZ there is NO depositor insurance either – if the bank fails, depositors risk losing money. There’s a system that the Reserve Bank administers involving what is euphemistically called a ‘haircut’, in which depositor money is simply taken to prop up a failing bank and keep it going, but it’s still to the cost and loss of the depositors.

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      1. Hmm…no idea whether we have ‘depositor insurance’ either, probably coz I don’t have any deposits. That said, the Australian govt spent big to keep the big four banks alive during the GFC, but the smaller banks were pretty much on their own.
        Balancing the household budget is the closest I’ve ever come to understanding economics, but it does seem as if the whole system is geared towards best-case scenarios based on trust. That seems like a very dangerous thing to me.

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        1. The Australian system is called the Financial Claims Scheme, administered by APRA (Australian Prudential Regulation Authority), and it guarantees deposits up to $250,000 in incorporated banks. New Zealand doesn’t. It’s been a point of contention. The argument among my colleagues, back when I was working in the Reserve Bank (in communications), was that ‘thuh markit’ was one of the controls in the system and if bank deposits were guaranteed, the directors would endorse foolish lending policies etc, knowing government was going to bail them out. The Treasury disagreed. The outcome was what the Minister of Finance called a succession of ‘chew sessions’ in which officials would meet with him, usually in the Reserve Bank building, to go over the issues. It occasionally involved a catered lunch. I mention this because one time the minister had to leave before eating his dessert, so it was removed back to the staff kitchen. Where I ate it.

          Apropos the trust on which the system is based – absolutely this is how it works. Even the value of money is purely one of trust. That’s been the case since the First World War when Britain dropped the old ‘gold standard’ in order to be able to print money to pay for the munitions. Today every currency is ‘fiat’, ie: it is based on legislation, not any fungible material such as gold. There is nothing ‘backing’ it other than the shared belief that abstract money has ‘value’.

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          1. lmao! Good for you. Was it a nice dessert?

            Was talking to the Offspring the other day, and we realised that every single thing in our societies runs on trust. We trust that people won’t run red lights. Why? We trust that water will flow from the tap. What if it doesn’t? We trust the supermarkets will have stacks of toilet paper…until they don’t. And then we stand there with egg on our faces.
            I guess civilisations fail when trust is lost completely. It’s actually rather scary how much we’ve bought into the fairytale. Not suggesting we all become survivalists tomorrow, but a little self reliance wouldn’t go astray.

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    1. Yes it did. There were many factors, but I believe one of the significant issues was that the German people lost faith in the Weimar government, in part as a result of the hyperinflation of 1922-23. Hitler and his cronies offered a credible alternative. Ouch.

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  4. It’s the same everywhere it seems and the UK has been hit hard – a 54% hike in energy bills, fuel price hikes etc. Our government is blaming it on the war, but the energy bill crisis was already upcoming long before the war. Putin has just made the long-term effects of it worse. But the Tories it’s perfect scapegoat territory.

    I saw on LinkedIn last week one bloke helpfully point out that poor people should just get higher paying jobs. That’s er, yeah. Solved the whole inequality crisis right there with some tremendous critical thinking.

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    1. This cost-of-living issue seems universal at the moment. It’s got to the point here where even two-income families are struggling to make ends meet. So far the government here hasn’t blamed anybody for it, but I don’t think it will take long. The National (‘Tory’) opposition have already insisted that what their Leader (former CEO of Air New Zealand) has called ‘bottom dwellers’ are the cause. Yup, apparently all NZ’s troubles are because the poor have chosen to be poor. What worries me is that the PM currently has rather less popularity than Charles Manson, and Mr ‘the poor are all bottom-dwellers’ CEO is very likely to lead the next government. Gaaah.

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      1. It’s head bangingly dumb, but it’s also very easy to blame the poor. Easy scapegoat. Ho hum, it’s not the best of times right now.

        Over here, the right-wing line is all the country’s problems are due to foreigners, lazy poor people, and the left. Of course. Man, I find it all baffling.

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