Gordon Campbell on the recession engineered by the Reserve Bank

025e8890db383dc0d71eThis week, we got official confirmation that the Reserve Bank has finally achieved the recession it has worked so hard to engineer. The Bank has bludgeoned borrowers and households with interest rate hikes, and sought to ease wage pressure by creating recessionary conditions that are being predicted to throw thousands of New Zealanders out of work. Hold the champagne, right?

The Reserve Bank’s relentless jacking of interest rates has sent pain waves through large numbers of New Zealand households, with the worst yet to come. This pain was mis-directed in that many of the main causes of inflation (some of them located offshore) were left completely untouched by our central bank tugging and pulling at the interest rate lever.

The sustained hikes were also unnecessary, given that the Reserve Bank has said all along that inflation was due to return to close to the target range by say, late 2024 regardless, and by natural means. There was never a serious risk of a 1970s-style wage/price spiral. Among other things, unions no longer have the power to deliver the wage hikes required.

So… Was slaying the inflation bogey a year or 18 months early, really worth causing so much hardship to people and damage to our productive base? Even though inflation – worldwide – has peaked, the worst of this central bank-engendered pain for New Zealanders is yet to come. The unemployment rate, the bank economists were telling RNZ this week, is likely to reach over 5% by this time next year. Mission accomplished.

High On Hikes

Those dire job loss projections are what happens when, as Moodys Analytics pointed out in its newsletter yesterday, the Reserve Bank goes to extremes:

…. the Reserve Bank of New Zealand has been amongst Asia-Pacific’s most aggressive central banks when it comes to monetary tightening by delivering a cumulative 525 basis points worth of hikes. Over a relatively short period household balance sheets have come under rising pressure from rising borrowing costs and hefty inflation.

But here’s the thing. Despite all that ultra-aggressive monetary tightening, there was still an almost inexplicable 2.4% q/q bounce in household spending recorded over the last quarter. How come? The answer contained in the Moody Analytics figures goes to show that inflation is not, as is so often claimed, everyone’s problem. Inflation, and its alleged remedies, affect many of us very differently.

For some vulnerable sectors, the cure really is worse than the disease, especially with prices being untouched. The combined impact of inflation and its alleged interest rate “cure” will be a very different experience for people depending on their class position, income levels, gender, ethnic groups, and age. While the mortgage belt is of concern, the impact will fall particularly heavily upon renters. If people don’t own where they live, renters stand to be victimised by landlords who – when they can next do so – will simply pass on their own RB-increased costs of borrowing, by jacking up the rents their tenants will have to pay, assuming those tenants will still have jobs.

For a further example of the different fallout from interest rate hikes: Retail trade over the past two quarters has fallen by a total of 2.9%. Spending on non-durables was down 3.4% in the last quarter alone. But spending on services? That’s up, at least among the upper classes who can afford the price tab. Moody Analytics again:

In particular, expenditure on services was up by 2.3% amid a rise in international air passenger services….In other words, Kiwis are spending less on non-durables as they hunker down, but are still wanting to travel internationally as the long and isolating COVID-related restrictions of prior years remain banked in memories across the country.

In other words, poor and middle income workers are being punished by the Reserve Bank via interest rate hikes meant to dampen down inflationary fires that (a) they did not create and (b) which are now being perpetuated by profit taking, and by spending on services by a relatively wealthy class of people that can afford to ride out the rising costs at the supermarket.

Besides the Reserve Bank’s rigid ideology, who else may be responsible for this mess? Could it, partly at least, be due to undue levels of profiteering by some corporates? Because… Amidst these bad times for most of us, many of them seem to have been pluckily doing very well indeed.

Greedflation, revisited

Knock me down with a feather. A study commissioned by Business New Zealand has found the business sector in New Zealand to be not guilty of fuelling inflation by hiking up prices. Before reaching their conclusions, the survey team doesn’t appear to have spoken to any actual employers, employees or customers en route to this declaration of innocence. Yet they believe their findings show that “greedflation” is a foreign and imported narrative that has no relevance to our apparently unique country.

It would certainly be nice to think that our business sector has refrained from jacking up prices, despite the golden opportunities to do so provided by (a) the Covid epidemic (b)the related monetary easing which left the economy awash with cash (c) the stubborn blockages in global supply chains, especially to and from China and (d) the Reserve Bank’s tendency to look in the opposite direction and blame wage rises and household spending (not profits!) for the cost of living crisis.

If you can believe Business NZ and its band of researchers…. Our banks, airlines, supermarkets, landlords, widget makers etc have largely refrained from taking the path of profiteering and price fixing observed in almost every other economy in the developed world. I’d like to think our corporate chieftains are uniquely virtuous, but I stopped believing in the tooth fairy quite some time ago.

There are a few things to be said about this small survey with the big conclusions. One, its main yardstick for profiteering is whether the post-Covid rate of price increases has notably exceeded the pre-Covid levels. Yet it could be argued in response that excessive profit taking in previous years had been baked into our pricing system so thoroughly that – even after Covid and quantitative easing – our low wage economy could only absorb limited amounts of further pain. While true, that doesn’t explain the sudden inflation spike we saw last year, in which prices became unhinged from the public’s ability to pay.

All the same, the survey’s dismissal of greedflation is not entirely borne out by its own findings. Sure, the survey cites input costs as the prime driver of inflation, but it also indicates that profits and wages are level pegging in second place. That’s fascinating. Because the Reserve Bank – with its eye fixed on that 1970s style wage-price spiral that was never going to happen – has not said or done anything in the past 18 months to suggest that profits have been a significant driver of inflation, and to a degree equivalent to wage pressures.

Profits have sat in an enchanted circle, untouched by Reserve Bank concern. Again, that’s not exactly a surprise.

Footnote One. The punishment being meted out to workers/households by the RB for the spike in inflation looks even more unjust when you consider the recent rise in immigration.

After pressure from employers who were facing a “tight” labour market related to a shortage of people willing to work insecure service jobs for crap wages while facing sky high rents (Hello, Queenstown !) The immigration floodgates have been dutifully opened by the government.

In the March quarter, our population rose by a whopping 1.6% with – to cite Moodys Analytics again – 78% of that rise being driven by net migration.

This [surge] was led by a net gain of 88,900 non-New Zealand citizens over the quarter, which is a fresh record high. The increasing return of foreigners to New Zealand’s shores is helping support demand for goods and services and gradually improving the much constrained labour supply.

So… What is the connection between the expected rise in unemployment over the next 12 months, the spike in inflation and the steep rise in migration numbers? Clearly, current workers in precarious service jobs are about to lose much of their ability to seek higher pay, given the availability of immigrant workers to fill those places.

What has been engineered here looks like a race to the bottom. Sure, some of those immigrants – and they’re not to blame for any of this – will be skilled migrants, and some of those may even help to create jobs. But nearly 100,000 migrants in the last quarter alone? To put it mildly, they’re not all skilled. But inevitably, such a boost in immigration will keep inflation high, if only because of the sustained demand for services and for say, rental housing.

In the short term in particular, immigration will do little (a) to help New Zealand escape from being a low wage/high cost/ high rent economy, or (b) help us to climb out of the hole that we’ve dug for ourselves thanks to our devotion to neo-liberal economic policy.


Now 30, Alice Phoebe Lou is a South African singer/songwriter based in Berlin. In 2018, her song “She” was nominated for an Academy Award as best original song, after being featured in a film about Hedy Lamarr the beautiful screen star and genius inventor of frequency hopping technologies for torpedo guidance systems. Later, the same principles became integrated into Bluetooth and GPS technology.

Four albums and side projects later (eg. the group Strongboi) in her ten year career, this video remains a terrific showcase for what has become her signature song: