PRICE OUTLOOK

Nelson Evening Mail, Volume LXXI, 11 September 1937, Page 6

PRICE OUTLOOK

FUTURE UNCERTAIN I | I'KOF. ISI.CLSHAWS OI’INION WEAKNESSES OF GUARANTEE Discussing Mr Nash’s estimate of the liability likely to result from the second ! season of guaranteed prices and also dealing with other features of the sysi tem. Professor II Belshaw, professor of I economics at the Auckland University College, said that there were so many factors entering into estimates of the price that it was impossible to arrive at a reliable figure, especially in the present unsettled economic and politi|cal conditions of the world (reports trie ''Star' ;. “On the present evidence.” said Proi lessor Belshaw. “we cannot expect any j substantial increase in price. Authoritai live opinion in Great Britain and I Europe is tha‘ economic activity will probably recede in the next two or three years, and such a recession wouid be accompanied by a fall in overseas prices.” If the anticipations proved to be correct, he continued there would be a substantial deficit accomulating in the Dairy Account at a time when the Dominion was entering upon a period of decreasing prosperity and these might within a short time become very large. The assumption underlying the guaranteed price policly had been that surpluses in the good years would be used t< make up the deficits when the prices obtained overseas were below the guarantee, remarked Professor Belshaw. There were grave difficulties in the way of operating such a policy and unless there was a quite unexpected rise in overseas prices New Zealand would be faced with gre wing deficits, without the prospect of behig able to meet these out of surpluses later. EFFECT OF DEFICITS

Continuing deficits, said Professor Belshaw, wou'd have two effects on the community. Firstly, there was the financial cost,'which was expressed in higher prices within the Dominion, or in taxation when the deficit was liquidated or funded. Secondly, there was the cost which would result from the fact that more resources w'ere being applied to dairying than was warranted by market conditions; such a diversion of resources reducing the amount oi goods of otner kinds which the community could afford.

"The logical outcome of guaranteed price in excess of tin 1 market price, if the best use is to be made of the country resources, is control of production. ’he stated. "This, of course, would involve serious difficulties.”

The financial effect of a guaranteed price ni excess of the market price, when the purchasing power was distributed, was to make for higher prices generally, said Professor Belshaw. This was an inflationary effect, and its chief danger was that if a given income to the dairy farmers was to be maintained a rise in internal prices would provide an argument for a still higher guarantee; so there would be the problem of a rising spiral of costs and prices which would seriously embarrass local manufacturing industries in competing with imported goods. Also the problem oi readjustment when overseas prices fell would he intensified. INFLATION OF CREDIT ' I

"The guaranteed price policy cannot be considered simply in relation to conditions in the current season,” Professor Belshaw said. "It must be viewed also in relation to anticipated future price changes and to the problem of adjustment when overseas prices fall. The oniy point in doubt appears to dg when the price fall will begin.” Questioned particularly as to the inflationary aspect of a guarantee involving deficits, ho stated that he regarded j the direct effect on purchasing power j ns being more important than any likely indirect effects through credit; expansion. The expenditure of the 1 £2.000.000 mentioned by the Minister would find its way into the deposits o' the commercial banks, which would (hen be in a position to increase their deposits, with the Reserve Bank and lo expand credit without endangering the ratio of such deposits to their liabilities, but it was extremely unlikely that there would be any considerable expansion from this cause. A credit expansion of this kind was not an automalic occurrence, but depended on the policy of the banks, and there was no reason to suppose that they would issue credit beyond the amount directly attributable lo the payment of the guaranteed 'price bonus

If. however. £2.000.000 additional were paid out Ibis year, a c fed it and currency position would be created which would reouire a similar payment next year, assuming that price's remained stead v