Finance with Don Fraser Fraser Farm Finance

There was an interesting story widely reported last month where Merv King, a former Bank of England Governor, signalled that printing of money was the wrong response to Covid-19 and this I would agree with. 

“If you simply print lots of money at a time when you are producing less, you have got a classic case of too much money chasing too few goods and the result is inflation,” Merv says.

I appreciate that it was done by many central banks around the world, including the UK. 

Now, after rapid inflation caused by too much money printing, New Zealand has a serious problem. 

With about $90 billion floating around, trying to find a home, it comes as no surprise that house prices and everything else has jumped by about 30 per cent.  The government refuses to accept that their money printing has caused all the rises as well.

I was startled to meet a young Indian man, an attendant at the local service station, regaling how he has been working here on a visitors Visa for eight years and has been trying to get residency to no avail. 

He then spotted my “no farms no food” slogan on the back of my truck and went on to say the same sentiment was recently used in India. Their government was trying to get more control of the infrastructure for all farming. The people rose up and protested and the Indian government backed down.  Maybe we need to stand up for what we believe in better

So back home the money has been created and we have overheated every part of our economy with house and land prices rapidly escalating on the back of all-time-low interest rates and hey presto, you have a perfect storm.  More than that, New Zealand is not producing anything more. In fact, our production is static. 

Yet our amazing agriculture sector continues to underwrite our economy

Tourism has basically vanished as well!

Now the Reserve Bank, to its credit - excuse the pun - is raising interest rates to try and stem rampant inflation. It has also asked the Government to be more responsible with the last $6 billion-odd of spending tagged in the last budget, only to be told by the government to butt-out and that they know what they are doing.

That may sound simplistic, but it is true, and the message is there. 

In every part of every sector, we see too much money chasing too few goods and services and the result is price rises or inflation.  

Given that the government refuses to work with them, the Reserve Bank has no other option than to raise the OCR, the cost of debt rises and this sucks money out of the economy causing inflation to slowly fall.  What an incredibly blunt instrument and the Government refuses to stop spending! 

If there is a problem in the economy, they just throw more money at it rather than looking for a better system, making people more accountable or changing the law!

I make some suggestions to help, so here we go.

Central Government must work together with the Reserve Bank to slow inflation.

If you have a lot of debt and are thinking of paying down debt, maybe you should salt the money away. You may need it later as things get tighter.

Cut back on unnecessary spending to keep more money in your business so you have a buffer. If things get really tough or you need to find some extra cash quickly, you will have it.

Sell down nonproducing assets, they cost money.

Ensure you spend less than you earn!

Watch out for the cost of hire purchases. A $30,000 HP costs you about $700 every month for 60 months, and the smell of a new vehicle quickly vanishes, that’s for sure.

Get a realistic view of yourself and your business and consider what is happening and the effect on your financial position.

In summary, the die is cast. It would be great if the government would stop spending to aid the Reserve Bank in its efforts to curb rampant inflation.

It is a bit like fishing, should the Government let the economy run or should they work with the Reserve bank to apply the drag together? Failure to do so may see the line break.

Disclaimer, these are the opinions of Don Fraser (an old fart).  Any decisions made should not be based on this article alone and appropriate professional assistance should be sought.

Don Fraser is the retired Principal of Fraser Farm Finance and was a consultant to the farming industry for many decades.  You can still contact him on 021 777 675.