I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel and IMF chief economist Olivier Blanchard.
Evans-Pritchard says: “Inflation targeting is dead”
“arbitrage opportunity of New Zealand well known in the UK”
Today I met with Ambrose Evans-Pritchard. He is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, in Europe, the US, and Latin America.
I have followed his writing for a number of years. For a period his by-line was ahead of the curve, and his analysis of the GFC and its consequences certainly has been. So I was keenly looking forward to meeting with him today. I was not disappointed.
We primarily discussed the topic which my study trip concentrates on – monetary policy, and its effects on exchange rates, current account deficits, growth in the real economy and private debt.
Ambrose said the credit inflows from the carry trade caused by New Zealand’s comparatively high interest rates must be a concern. He said that in the UK the arbitrage opportunity in New Zealand was well known.
I said that, in my view, for a number of years the Reserve Bank underplayed the seriousness of this, despite the fact that those credit flows fuelled the consumption binge and asset price bubble that higher interest rates were meant to curb.
I was struck when Ambrose commented that “inflation targeting is dead”. He was interested to know why it has persisted in New Zealand. I said maybe it was because of our experience with stagflation in the 1970s and early 1980s.
Ambrose said Great Britain would be in a far worse position if it had not been able to adjust to its decline in circumstances via a drop in the pound, which has led to resurgence in manufacturing, especially in the car industry. What a boost it would be to New Zealand’s modern manufacturing industry to have a dollar unaffected by arbitrage.
We traversed my view that competitive devaluation is alive in the world. Ambrose said he does not know whether it was an objective of the USA’s quantitative easing, but a consequence has been a 12% pa narrowing of the terms of trade gap between USA and China.
Ambrose believes UK and the USA will embark upon further quantitative easing that will have flow-on effects to the New Zealand dollar. We discussed whether concentrations of wealth born of the huge trade imbalances and settings in some countries means there is a need for greater care or attention to asset price bubbles and whether the globalisation of investment flows (as opposed to trade flows) is desirable.
We discussed the contrast between New Zealand under Clark/Cullen and the UK under Blair/Brown. Cullen ran budget surpluses, leaving low government debt and countercyclical tax cuts, whereas Brown ran deficits of 3% of GDP when he should have been running a 2% surplus.
That 5% pa of GDP stimulus, and slide in the UK government books, has left a government debt hangover for the UK reminiscent of the debt burden Muldoon left for New Zealand in 1984. I told Ambrose that it took New Zealand a generation to overcome that debt burden, and that my impression, as an outsider, is that the likely length of the consequences of government debt levels in Europe does not appear to have fully sunk in.
Extremely insightful thoughts overall, especially the death of inflation targeting, the carry trade knowledge in the UK and the consequences for asset prices, eg housing, of free flow of investment funds (as opposed to free trade) given huge wealth concentrations of wealth and the trade and current account imbalances in the world.
Next I’m off to the OECD.
I’m going to be sending a few emails about the discussions I’m having while overseas. If you’d like to receive them, please click here.