Tuesday, 28 October 2014

Economic Ignorance

Just heard a report on the radio about the economic literacy of New Zealanders. To sum up, it's generally dismal. This may explain why they think raising minimum wages and increasing welfare benefits is a good idea. The people polled were being asked to define "inflation". Only one person even came close, and to top it off, the definition given by the reporter-"inflation is an increase in the cost of goods" was incorrect! Inflation is a decrease in the value of a currency, usually caused by printing too much of it. For instance, if the price of petrol increases due to an increase in the price of crude, this is not inflation, this is an increase in the price of an increasingly rare commodity. Since oil is a major input into other goods and services, these prices will also increase, but this still is not inflation. When all goods and services in aggregate increase in price because vendors don't want to accept increasingly devalued dollars as currency this is inflation. There is a big difference between these two definitions. The government creates inflation by printing money to pay its bills, thus increasing the pool of money available. Thus if you have savings - and smart people increasingly don't the government is slowly ripping you off, soon your saved money will be worthless. Unless people understand these differences New Zealand is economically doomed.