“The Reserve Bank plays an important role in the functioning of money. It provides the country’s notes and coins and works to keep prices stable. It also promotes, through regulation, the soundness of the institutions where people keep their money (like banks and many finance companies) and the soundness of the payments systems sitting behind the financial system.”
So said an email from the RBNZ we received this week.
The email featured a “what is Money” video and encouraged “Community groups, schools, media outlets and organisations promoting financial literacy… to post a link to the video on their own websites or Facebook pages.”
So here’s the video
RBNZ Video: What is Money?
However as our contribution to money week, while we’d encourage you to explain to your kids the 3 features of money as per the RBNZ video, please don’t stop there.
We’d also recommend you share with them the RBNZ’s very useful inflation calculator.
Well, this adds a bit of perspective when it comes to the 3rd function outlined in the video:
“Money is a store of value”
The happy little video states:
“Money is a useful store of value. This is because its face value stays the same — a $20 note will always be worth $20. It is also a convenient way to store your wealth. Rather than having to keep a flock of sheep for his savings, Charlie can build up his money in a savings account.
The Reserve Bank plays an important role in helping to guard the value of money when it is stored. It sets the rules that banks and finance companies must follow to reduce the chance of these organisations failing.
One of the Reserve Bank’s main jobs, however, is keeping prices stable. This means helping to ensure that a loaf of bread doesn’t cost you twice as much tomorrow, as it did yesterday. Keeping prices stable; fighting high inflation – means Charlie can have confidence in what his savings will be worth when he wants them.”
So why is the RBNZ wrong about money?
Well it is of course is true that “a $20 note will always be worth $20”. That is the “face value” always remains the same. A $20 dollar note will always say $20.
The video also shows that in 2034 a $20 note will still be worth $20 just as it is in 2014. But we wonder how the folks at the RBNZ can say this with a straight face!
Because of course $20 will not always buy the same amount of goods.
Let’s look and see how well NZ dollar has performed as a store of value over the past 20 years, care of the aforementioned RBNZ inflation calculator.
A decline in purchasing power of 36.3% doesn’t seem like a great store of value to us!
Plus this is using what we believe are fairly iffy official government numbers that understate inflation. Because these inflation numbers will include the use of the likes of substitution. This means, when one good rises too much, it is swapped out for another cheaper good on the assumption that this is what everyone will do.
Eye fillet steak too expensive? Have some minced beef instead.
Changing the category from “General (CPI)” to “Housing” shows just how much the cost of living has risen in New Zealand in the past 20 years.
A 225.9% rise in housing costs! Perhaps they should use substitution to swap housing out of the inflation stats for a shed, or maybe a cardboard box?
Sarcasm may be lowest form of wit but we think it can demonstrate a point rather well.
The NZ dollar has been a terrible store of value over the past 20 years.
Odds are it will be a terrible store of value over the next 20 years too.
So by all means share the RBNZ video but maybe do it by sharing this page on our site instead. That way people get the right kind of education about money. Not the dumbed down, government mandated education.
Just click the relevant “share the knowledge” link below to share this page now…