Uncertain Times

The rise in the OCR has generated a lot of economic commentary, including from some in the insolvency industry known to have a passion for self-promotion. Few commentators, however, pointed out the incongruity of the Reserve Bank rising interest rates to dampen down demand, while the Finance Minister is handing out helicopter-money to over two million residents, which will counter-act some of the Reserve Bank’s strategy. In one sense, this makes sense. The governor of the Reserve Bank wants to get inflation under control, and the Minister of Finance is burdened with a wider economic and social remit and, this author suspects, the governor has more grapeshot than the finance minister when it comes to dampening down demand.

The economic impact of these changes, however, is unknown and unknowable. The financial pages are spilling over with economic analysis. None of it will age well. The uncomfortable reality is that we have not been in this position before and so neither our economic models nor historical analysis provides us with many clues as to how the macro-economy will react. However, there is something we can see occurring; the ongoing fiscal stimulus, combined with loose monetary policy. For many years this combination, that in past times could have been expected to produce run-away inflation, didn’t. There are many explanations that have been offered for this; from the Modern Monetary Theorists who claim that printing money in a growing economy is need not be inflationary to the more conventional theorists who believed that the velocity of money had simply slowed.

Well; that has now ended; as we have inflation. Now is a good time to remember Stein’s Law; “If something cannot go on forever, it will stop.” Just as printing money without inflation was something that could not go on forever, running a fiscal deficit forever without some consequence is also something that cannot go on forever. How it will stop isn’t clear; but that it will stop is certain.