The thin end of the wedge

Russel Norman wants the Reserve Bank to print money; 3 News reports:

The Greens called yesterday for the Reserve Bank to create more money to buy earthquake recovery bonds for the costs of a Christchurch rebuild, and to top up the natural disaster fund of the Earthquake Commission.

"The global financial crisis has changed all the rules and National's doctrinaire approach is no longer serving our economy well," says Greens co-leader Russel Norman.

"We're proposing that the assets they should purchase are earthquake recovery bonds issued by the Government, which means the Government has to borrow less from overseas which reduces the pressure on the New Zealand dollar."
Mr Parker says the Reserve Bank, which has inflation control as a priority, needs its target broadened. He says that could be done within current legislation.

And Norman has some high-powered support:

Labour is joining the Greens in pressuring the Government to intervene to reduce the value of the New Zealand dollar.

Finance spokesman David Parker says his party can see some merit in the Green Party's call yesterday for the Reserve Bank to create money, or what is known as quantitative easing.

It's "only" going to be $2 billion that is quantitatively eased. And it's only to buy earthquake recovery bonds.

Russel Norman must be daft if he expects us to swallow that. What he is proposing is simply the thin end of the wedge, and he will quickly find other justifications to print more and more money. And each time he does, inflation will rise, and life will get tougher for everyone, Green Party supporters included.

The high value of the New Zealand currency has very little to do with a strong New Zealand economy, and everything to do with the plunging US dollar. And what has been Barack Obama's response to the US economy? Why, it's been quantitative easing!

The last thing that New Zealand's fragile economy needs is burgeoning inflation, led by skyrocketing fuel prices when the exchange rate suddenly drops. Employers do not have the capacity to pay wages that keep pace with price rises, given that the employers will have to pay those price rises as well.

The continued high exchange rate is certainly causing problems for exporters. But simply printing money to force the exchange rate down is not the answer.