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.


  1. Inflation means your money won't but as much today as it could yesterday. It's that simple. There's all kinds of reasons for this - including printing too much of it as your mentioned.

    Milton Friedman and his Chicago cult of strict monetarism from the 70's would agree with you that this is always the cause, but really sorry, I don't. Whenever monetarism failed to control inflation, their prescription was "more!". Their antics eventually induced recessions, a drop in aggregate demand and a drop in the inflation rate - how clever. M3 used to be reported reverently in the financial press, but you don't hear much about it anymore and that's no co-incidence

    Rises prices in the price of inputs *will* also induce inflation. The follow-through effect of an increase in the oil price means that the cost of *everything* rises, and your money will buy less.

    Oil prices don't just rise because it's "an increasingly rare commodity" - they rise because of changes in supply and demand - just like anything else. If your assertion were correct, there is no explanation in the drop of the oil price from over USD100 some years back to it's current price of USD45-55.

    It is true that the RBNZ has an inflation target, and it is positive. Deflation hits the economy hard - why buy something today if it is worth less tomorrow? Suddenly businesses can't sell things and they lay off workers. Not helpful.

    Here's the definition from the RBNZ:

    "Inflation is the term used to describe a rise of average prices through the economy. It means that money is losing its value. The underlying cause is usually that too much money is available to purchase too few goods and services, or that demand in the economy is outpacing supply."

    Note the "usually" and also the second cause listed.

    I'll take their definition over yours. Unless of course you believe there is some undeclared conspiracy and that RBNZ is "in on it".

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