Gordon Campbell on hiking up interest rates

41442e207f4683839775Elsewhere in the world, some central bankers are showing signs of re-considering the wisdom of barrelling on with the crusade against inflation. For fear that constant rate hikes may now be doing more socio-economic harm than good, there is talk in the US and in Australia of pausing the rate increases to check for the signs of recession, and to see whether inflation has peaked. After all, the pain being caused by hiking up interest rates mainly falls on the firms, workers, mortgage holders and renters who are innocent of causing the problem.

Regardless, the Reserve Bank is widely expected to announce on Wednesday a further .25 hike in the official cash rate. We have been conditioned to think the hardship this creates is inevitable, and is for the greater good.

Yet in their saner moments, most commentators will concede that inflation is being driven – internationally and domestically – by factors well beyond the control of central bankers. I’m talking about factors like fuel prices, supply chain blockages, the war in Ukraine, the supermarket duopoly, the immigration policies that create labour shortages etc. etc. None of the above can be addressed by hiking up interest rates, by throwing more people out of work, and by making lots of people pay far more for their mortgage, or rents. They’re being treated as collateral damage.

Household spending and the skilled labour shortages that feed into wage increases are not the root causes of the cost of living problem. (Wage increases routinely lag behind cost of living increases.) Put it this way: When there’s mould on the walls of the house, it is not a good idea to use a sledgehammer to try and get rid of it.

“The idea that the central bank can manage inflation by skilfully raising or lowering interest rates has always been a myth — historically, there’s no evidence for it,” [said] economist Steven Hail, an alumnus of the London School of Economics and associate professor in economics at Torrens University. When it comes to inflation, Hall continued, central bankers are like kids with a toy steering wheel:

“When people imagine that the Governor of the central bank has a huge amount of power to drive the economy, to manage inflation, it’s not unlike somebody looking at a child in the passenger seat of a car with a toy steering wheel, and thinking the child is steering the car.”

Yet here we are. Arguably, the key drivers of inflation – and of other problems to do with productivity, pollution and poverty – are structural in nature, and can be addressed only by political decisions. In the meantime…. Since our central bank seems unwilling and/or impotent to address the causes of inflation, most of the blame gets levelled at spendthrift households and greedy workers.

In the sterile jargon of central banking, there needs to be an “easing” of labour market pressures before the Reserve Bank lets up. If so, more firms will be cutting back and/or going under, more workers will be being laid off, and fewer people will be asking for wage rises. Meanwhile, the banks. supermarkets and airlines will continue to make out like bandits. And households will continue to be punished for paying what the market demands, in order to get the essentials at the checkout.

Right now, household spending and employment are acting very much like Wile E. Coyote in the Roadrunner cartoons. They’ve gone off the cliff and are peddling in air, just before the “uh oh” realisation kicks in, and they hit the canyon floor. Many NZ households are still on fixed term mortgages. They have yet to feel the full impact of how badly their spending power is going to contract, thanks to what the Reserve Bank has already done to interest rates.

By pressing on regardless before the lagged effects have fully kicked in – and that will happen during the second half of this year- the Reserve Bank is ensuring a hard landing will occur, one that will be worse than it needs to be. Arguably, the Reserve Bank is wilfully not giving itself enough time to gauge the full impact of its actions to date, although it knows a slowdown is already nigh, if not already arrived.

Lose/Lose = Collateral Damage

For more than a year, the Reserve Bank has felt itself to be in a lose /lose situation. If it eases up on the rate increases, it risks entrenching inflation. But if it keeps on raising interest rates it risks cratering the economy in a hard landing likely to cause lasting damage.

Given a choice, most New Zealanders would probably prefer to pay a bit more at the supermarket than lose their jobs or see the firms they helped build go under. Moreover, there are signs that the New Zealand economy is already slowing down. It doesn’t need to be pole-axed with another rate rise on Wednesday.

Prosecuting (and Convicting) Trump

To some people in Europe, Africa, Asia, South America etc the furore about the “unprecedented” indictment of former US President Donald Trump must look like another example of American exceptionalism. Yes, no former US President has been indicted on criminal charges, and the only former Vice -President ( Aaron Burr) to be indicted on criminal charges was found not guilty, three times.

But in the rest of the world, prosecuting (and sometimes convicting) former leaders is hardly exceptional, and it doesn’t necessarily spell the end of their political careers. Benjamin Netanyahu, Silvio Berlusconi, Nicolas Sarkozy, Jacques Chirac, Lula of Brazil, Najib Razak of Malaysia, Kakuei Tanaka of Japan, Christina Fernansez de Kicrhner of Argentina, Hissan Habre of Chad, Charles Taylor of Liberia and Alberto Fujimori of Peru are just some of the former heads of state to be convicted in criminal cases brought after they left office. Some of them have remained leading political figures at home.

As yet, we don’t know the full details of the Trump indictment, and how (and whether) the hush money payment to actor Stormy Daniels will relate to other looming court cases facing Trump. These include his alleged role in the January 6, 2021 attack on the Capitol, his alleged attempt to subvert the election outcome in Georgia, and the business dealings to do with Trump’s allegedly false valuations of some of his New York properties.

Suffice to say, the Daniels payment (if proven) would violate a New York state law that forbids the mis-characterisation or under-reporting of hush payments or fringe benefits. There is a felony offence to do with falsifying certain classes of business records and Trump may be charged with filing false business statements and tax returns, or of destroying evidence relevant to those returns.

But here’s the thing. Apparently in order to reach the felony threshold, the New York state prosecutors will also need to prove that this falsification was done to facilitate the committing of a further crime. At least that’s my reading of what the New York state statute 175:10 says:

§ 175.10 Falsifying business records in the first degree. A person is guilty of falsifying business records in the first degree when he commits the crime of falsifying business records in the second
degree, and when his intent to defraud includes an intent to commit another crime or to aid or conceal the commission thereof.

To an outsider, this looks difficult to prove. Can the New York prosecutors really link a state law violation (of 175.10) to a federal law to do with election payments and transparency? Or less messily, is there a New York state law to do with election campaign records that can usefully limit the offence solely to that state, and thus make for a smoother linkage to a second felony?

Making such a linkage could still be tricky. For all of the grandstanding and victim mongering by Trump and the Republicans, this Daniels case may be the easiest charge to defend of all those that Trump currently faces. But we won’t know that for sure, until we see the details of the indictment later this week.