The 1-3% inflation target is really a circulation incentive and we need to read Gesell instead

The other morning on the radio I distinctly heard a senior politician say that the economy wasn’t going well ‘because the inflation rate was too low at below 1%’.

I thought I was hearing things. Indeed someone coming to Earth from Mars might ask a few questions. Presuming inflation is a bad thing and it is now near zero, why then is the economy not going swimmingly?

Then I remembered what I had recently learnt – that economists had designed a 1-3% inflation target as an ideal because you had to have some incentive to spend today or the economy would seize up. You didn’t want inflation too high, but a low rate of inflation is acceptable and even necessary simply because otherwise people hold on to their money and nobody spends. They realise that goods will be dearer tomorrow – if only by a little – so they decide to spend now rather than wait.

Goodness, how few people know this. And how it is becoming exposed now that the inflation is below 1% in more than one of the developed nations.

Now land was taken out of the CPI in 1999 as you can see in this graph.inflation NZ

Yes the graph makes good sense. With land safely out of the CPI, economists can brag that their target has been achieved for a consistently long period. And you had the huge land bubble of 2002-2008 never recorded in the CPI and then again the land bubble of 2011 onwards completely out of the graph.

So putting aside this statistical sleight of hand, we also know now that the national currency must have a circulation incentive. (That is under the current currency design of money created as interest bearing debt)

As we collectively head blindly into a period of deflation of unknown length and pain, we must pay attention to the writings of Silvio Gesell, a far thinking German businessman who also lived during a Depression in the 1880s in Argentina. His book The Natural Economic Order has been translated and put online for all to read. Of him Keynes said "The world will owe more to Gesell than it does to Marx".

Gesell realised that a businessman with goods is at a disadvantage from those holding money. While the goods decayed, rotted and generally went out of date as they waited for someone to buy them, the money retained its value. Those in possession of money were better off than those who had goods. He famously wrote: "Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether."

After decades of having loyal followers, during the 1930's depression, Gesell's theory was put into practice, but only briefly because the banks managed to persuade the government to stop it. It was in the small town of Wōrgl, Austria 1932 that the Mayor put aside 20,000 schillings and used them as backing for notes called Work Certificates. They paid their employees partly in Work Certificates. Each note had 12 spaces on the back and a stamp had to be stuck on every month to validate the note. To avoid paying for the stamp people spent the Work Certificates quickly. The currency was successful at reducing unemployment, so much so that people came from miles around to witness the Miracle of Wōrgl. It was in place 15 months before the government made it illegal and they went back to unemployment.

Inflation or Growth Ridiculous Options

We have just sent out the following media statement (but have left out my phone number for this version)

Media Statement

13 March 14

Inflation or Growth Ridiculous Options – New Economics Party

The unproductive arguments raging among economists and central banks about when and how much to raise interest rates to curb inflation illustrates the complete failure of conventional economic theory, according to Deirdre Kent, spokesperson for the New Economics Party.

“Here we have the Reserve Bank putting up the official cash rate to keep inflation below 2 percent and the manufacturers saying that will slow productivity and put people out of work. Economists argue themselves round and round.

"It seems then that under the orthodox economic theory, you can’t both avoid inflation and have a thriving economy. A small child can see how stupid this is. Surely, the child will say, intelligent adults can invent an economic system where there is no inflation yet there are jobs at the same time?

"The problem is that governments and central banks are relatively helpless when they allow banks issue 98% of the country’s overall money supply as they do in New Zealand. They have few tools at their disposal to curb inflation. We end up with this inane cycle of inflation one minute and unemployment the next.

"During the Depression, Wörgl, a small town in Austria, created its own money and charged a circulation fee. Every month the holder of a Work Certificate had to buy a stamp and place it on the back of the note to keep it valid. So the money circulated fast. At one stage there was inflation, so some notes were withdrawn from circulation. Over 15 months, unemployment in Wörgl dropped 25 per cent, when in the rest of Austria it had risen 10 per cent during the same time period."

The New Economics Party supports a return to state seignorage, where the country's legal tender is issued by the Treasury and not by commercial banks.

A dual currency for New Zealand (Starve the Banks and Pay the Government)

We are in a depression. Yes the first stages of one and of course politicians will not name it as that until we are well into it. Good thinking emerges from depressions. In the 1870s depression Henry George figured out that since we can't all occupy the same land, those who have monopoly use of the best land should compensate the rest of us for the privilege. The way to do that was not for government to own the title to the land, but for land occupiers to pay a tax or rental to government instead of income tax. He wrote Land and Poverty. In the 1880s depression Silvio Gesell, a German businessman working in Argentina, noticed that those with goods were at a disadvantage compared with those with money. Since money gained in value from being withheld, it stopped money circulating. He therefore advocated that money should decay like goods and be as disagreeable as goods. He wrote The Natural Economic Order and sparked a movement which lasted. In the 1930s John Maynard Keynes worked out that governments should spend money into existence to stimulate an economy, including on infrastructure. During the last two decades Bernard Lietaer has observed that situation where governments issue one monopoly currency can't help but lead to sovereign debt crises, monetary crises and inflation crises. Like the late Richard Douthwaite, he advocates an ecology of currencies for resilience. Search on youtube for his presentations. In the proposal presented in the following slide show, with inspiration from Adrian Wrigley of UK, I have put together all these ideas. http://www.slideshare.net/deirdrekent/starve-the-banks-and-pay-the-government-13876092. I recommend you take the time to look at it. This idea continues to develop as I run it past our supporters and others. I expect it will develop and clarify further yet. Please respond! And the actual paper is now at http://neweconomics.net.nz/index.php/2012/08/proposal-for-a-dual-currency-for-new-zealand-one-for-domestic-use-only/

Land went out of the Consumer Price Index in 1999

Despite the fact that section prices tripled in fifteen years to 2007, land is not now included in the Consumer Price Index. This means that the official measure of inflation is unreliable as it is far lower than the actual figure.

Today I received a letter back from the Minister of Statistics, Hon Maurice Williamson. I had heard that land went out of the CPI but couldn't remember when or why so I sent in an Official Information request. The Minister dates the letter 14 Mar 2012 and says "Dear Ms Kent

Thank you for your letter of 20 February regarding the exclusion of the price of land from the Consumers Price Index (CPI) basket of goods.

"I am advised by Statistics New Zealand that land (i.e. residential section) was included in the CPI until the June 1999 quarter. Following a review of the CPI in 1997 land was excluded, taking effect from the September 1999 quarter.

"The 1997 review by an external advisory committee confirmed the CPI's main purpose as being informing monetary policy setting, and that the CPI should be focussed on the concept of "acquisition". The reason given for excluding land from the CPI from 1999 was that it was considered to represent the investment component of home ownership (with dwellings representing the shelter component).

"The September 1999 quarter CPI information release explained it as follows: "A dwelling provides shelter over a long period of time. Over time land is not consumed and so can be considered to represent the investment component of home ownership. As investment expenses are outside the scope of the CPI the rebased CPI excludes expenditure on residential sections."

"Information on the sale of land is available from QV (www.qv.co.nz) and the Real Estate Insititute of New Zealand (www.reinz.co.nz).

I trust this information meets your needs and thank you again for taking the time to write.

Yours sincerely

Hon Maurice Williamson

Minister of Statistics.

You can be assured I will write back to ask how inflation can be accurately measured when the price of residential sections is excluded. Every time a section rises in price it puts up the price of the property. So when someone buys property in the future, they will have to pay a higher prices than previous owners paid. This also means the total mortgages and the total money supply has to rise accordingly. When the money supply increases there is inflation. So it is not a small quantity we are talking about. We are neglecting a huge factor. The CPI cannot be taken as a valid measure of inflation and there is no reason to have any faith in it. The Productivity Commission said the price of residential sections tripled in the fifteen years to 2007.

Right now we are going through a period of fairly stable prices, but no doubt in the future the cycle will come around again and prices will rise.  The value of all residential properties in New Zealand was estimated by the Tax Review committee of 2007 to be $298 billion. This excluded land for commercial forestry, agriculture, industrial, commercial or mining or land owned by central or local government.

As Eisenstein says "Money is deeply and irretrievably implicated in the conversion of the land commons into private property, the final and defining stage of which is its reduction to the status of just another commodity that can be bought and sold." After this letter, we could add to this "and used as an investment".