By Bernard Hickey
Insurance is at the top of everyone's minds after the earthquakes in Christchurch.
But we rarely think of New Zealand as needing a national insurance policy against a global economic disaster.
UCLA economics professor Sebastian Edwards raised this idea at last week's Macroeconomic Imbalances conference as a way to shift the debate about New Zealand's vulnerabilities.
Currently New Zealand's policymakers seem stuck in a trap that seems to end in either electoral defeat or national bankruptcy. Tough political decisions are needed to fix our economic problems, but politicians are reluctant to suggest or enact them for fear of alienating voters. The government has already been advised by the Tax Working Group and the Savings Working Group that it needs to quickly return to surpluses to increase national savings and reduce the upwards pressure on interest rates and our currency and therefore encourage a refocus to production and exports.
But most suggestions involve serious political pain, including the end of handouts such as Working For Families, Interest Free Student Loans and cheap doctors visits, the imposition of a capital gains or land tax, and an extension of the retirement age.
Any one or a combination of these is seen as electorally suicidal.
So we seem locked in to an inevitable drift towards the brick wall of a financial crisis where New Zealand is forced to make the necessary changes by our international creditors. We only need to look at what has happened to Greece and Ireland to see how painful such enforced remedial action could become. There politicians and voters are having to swallow bucket loads of dead rats to ensure they can keep borrowing, including tax increases, massive public spending cuts and forced fire sales of public asset.
But as Edwards pointed out, New Zealand is different because we are less vulnerable than the PIGS (Portugal, Ireland, Greece and Spain) to an immediate crisis.
Although our net foreign debt is almost as high as in the PIGS, the debt is mostly private debt held through our banks rather than government debt. Also, our floating exchange rate and the fact most of our debt is issued in New Zealand dollars helps protect us if our creditors decided to turn off the taps. The resulting slump in our currency wouldn't increase the debt in New Zealand dollar terms and it would help us export and inflate our way out from under the debt, although it would enforce more austerity through higher interest rates and make consumers poorer because imports would be much more expensive.
So Edwards is right in saying New Zealand has some time and some tools to fix our vulnerabilities.
So how do we convince ourselves to take some short term political and economic pain now to reduce the risk of catastrophe later.
Edwards suggested we think of these measures as a type of insurance payment. People are more relaxed about foregoing consumption now if they think it protects them in the future. See Edwards' paper here in full.
He suggested a variety of insurance premiums could be 'paid'. They include building up our foreign reserves so that if our currency did collapse these reserves are automatically worth more in New Zealand dollar terms and could be used to boost the currency back up. That could involve increasing the size of the New Zealand Superannuation Fund with the proceeds of budget surpluses. The government could also impose a tax on foreign capital inflows or a tax on wholesale financial transactions to help build up those reserves.
Also, the Reserve Bank could impose various capital controls on banks that reduce our ability to borrow offshore cheaply. They could include increased capital requirements for property lending, limits on loan to value ratios and an increase in the Core Funding Ratio that makes it more difficult for banks to borrow from hot foreign money markets.
All of these are sensible insurance payments to protect us in the future.
So why can't we see these changes as a necessary cost rather than optional self-inflicted pain?
91 Comments
Fari enuf. There is an argument to be made that NZ should wait and bide its time. Once the crisis hits then they can buy gold at a deep discount. But your theory will only work if 1) Gold does indeed drop and 2) there is even any actual physical gold to get ahold of.
Likely as not, what you have if you have any, will be stolen by your very own thieving govt...an utter certainty in the land of the free and the brave!....and highly probable here too because the govt can do what it bloodywell wants in NZ.
So if you own gold...make sure it's in your hands...and expect to be treated as a criminal for not handing it in...and realise that you will not be able to sell it...or use it...without getting caught.
It's the selling and the using that matters...isn't it?
:-) Was waiting for that - always comes out when the conversation gets to gold. Can't eat fiat, stocks, bonds or derivatives either - paper and bits/bytes just ain't that nutricious either. But when the chips are really down, gold and silver will buy you food when pretty much nothing else will. Fags, booze and ammo will also be useful I guess.
New Zealand DOES NOT need to take out insurance against anything.
Facts:
- New Zealand is a sovereign issuer of a non convertible fiat currency. Greece is not. Any comparison between New Zealand and Greece is apples and oranges, as their monetary system is vastly different.
- New Zealand DOES not need to issue government "debt" to fund spending. The New Zealand government IS NOT revenue constrained. It spends by simply marking up bank accounts (crediting them) on a computer. Foreigners DO NOT fund our spending - their accumulation of NZD denominated assets is simply a function of our current account deficit, similar to the United States.
- The central bank sets interest rates, not the "bond vigilantes". Interest rates on government securities will remain as low as the RBNZ wishes.
- Key Point: Issuing government securities DOES NOT increase the governments net debt, but rather expands its balance sheet with additional assets and liabilities. The government does not become further in "debt", as CURRENCY ON ISSUE IS GOVERNMENT DEBT. That's right. The $20 in your pocket, provided it didn't originate from a commercial bank loan, IS A GOVERNMENT LIABILITY. Exchanging this $20 cash for $20 of securities DOES NOT increase the government's net "debt".
Don't believe me? Try explaining why Japan has 2-3x the sovereign "debt" of the PIGS, runs good size deficits, yet interest rates on securities are at rock bottom lows? New Zealand has the same monetary system as Japan, USA, UK, AUS etc, but NOT Greece.
And while your at it, explain why Japan doesn't use some of its $1T USD Treasury's to pay off some of its own government "debt".....
Once you understand our monetary system, you will realize the reason NZ fell behind over the last 20 years is because we were running government surpluses and current account deficits at the same time. Anyone who understands economics (most people don't) would understand that this is economic suicide. If the nation is running a current account deficit of 5% of GDP, then the government deficit must be AT LEAST 5% of GDP as well, probably more, otherwise the domestic private sector is by accounting identity, negatively saving. But no, since 1994 we have been running government surpluses and current account deficits at the same time. By accounting identity, in order to prevent deflation and an economic depression, the private sector MUST negatively save / leverage itself. This is exactly what happened (it coincided with the housing bubble). Government deficits are now slowly undoing the worst economic policy in our history (government surpluses).
They all have current account surpluses, meaning that even with a budget surplus, their private domestic sectors can still be saving. That's not the case in NZ - if the government runs a surplus and the nation runs a current account deficit, the private domestic sector, by accounting identity, must be negatively saving.
Either way, the government NEVER needs to "save for a rainy day". Our government never has nor doesn't have NZ dollars.
And thats hardly a recipe for every country, because for every dollar of current account surplus they have someone else must have a current account deficit. The sum of all current account surpluses and deficits worldwide is zero (obviously).
I was highlighting the key and basic points about how our monetary system works - something which very few people fully understand. Most people believe "governments will run out of money" - this is never a problem for a government like NZ's (it is for Greece though). On the other hand, the only problem with high net government spending and low taxes is inflation - and yes, this is a very real problem. But yet again, mainstream economists are misguided and don't understand when and when not high inflation is a real risk - a perfect example of this is the Fed's quantitative easing program. All of the fools have been calling for a US hyperinflation because of "money printing" - in reality, quantitative easing is not "money printing", and has not resulted in high inflation (underlying inflation is still very low in the USA). It has, however, contributed to a build up in equity and commodity speculation, and hence their prices.
And sorry, I will have to link you other resources. The monetary system is very complex and the time taken to explain it all here would be measured in decades.
I can however link you to the following resources -
This is the most basic introduction to the subject. It is written in very non technical terms for the very beginner. Most people react to it by saying "complete nonsense and propaganda" due to its simplicity, but in fact it is all correct. The author is a former top ranked hedge fund manager, now owns a Florida bank, and regularly visits the Fed to discuss monetary policy. He is an absolute expert in monetary operations.
Click on the PDF link on this page: http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
Alternatively, the same author has a much more detailed and technical paper "Soft Currency Economics" on the subject, which can be found here: http://moslereconomics.com/mandatory-readings/soft-currency-economics/
Other than that, this is a very handy resource and website that constantly has discussions regarding the issue. http://pragcap.com/resources/understanding-modern-monetary-system
If your the visual accounting type, then this is perfect for you. In my opinion, this is one of the best monetary operations resources on the internet: http://econviz.com/balance-sheet-visualizer.html
And note, this isn't all new. It has been slowly developed over decades by James Galbraith and his father John Kenneth Galbraith, Hyman Minsky, Wynne Godley, Abba Lerner and others. Many people have each contributed a piece to the puzzle - and have ensured their work is consistent with economic accounting identities. (Note that a problem with a lot of macroeconomic theories is that they are not stock - flow consistent, nor consistent with accounting identities).
The points I made above are merely the select few key points that highlight the issue. Explaining them alone would not be enough to help you learn the operations of the monetary system. It's a long process and it will take you a few months of reading and discussing on forums for an hour or two a day - it does for everyone. After all, economics is very counter-intuitive. For example, if one person decides to put away 10% of their paycheck each week, it would be fair to say they are personally saving, right? Yes. However, would total saving within the economy increase? No. In fact, assuming the government budget deficit and current account balance are held constant, no matter how much people put away each week, the nation as a whole will not be "increasing its saving". This is one of many counter - intuitive examples the links above deal with.
If your more interested, read the above links. It will take time, but trust me, it may be the most enlightening knowledge you ever gain. You will look at the world through a different lens, and you will be able to see that most of the what the media and politicians say is nonsense.
No problem - this knowledge is so important and it desperately needs spreading! If you have any questions, don't hesitate to ask - I'll keep an eye on this thread even after it goes off the main page.
Also, I don't know if I mentioned it before, but the site Pragmatic Capitalism ( http://pragcap.com/ ) regularly has discussions on issues like this. It is American, but all of it generally applies to NZ. I have spent quite a bit of time reading economic/financial articles/blogs/papers on the internet, and this is by far the best site I've ever come across. The comments section is tremendous, and the author/blogger (a talented hedge fund manager) frequently responds to questions. The "Understanding the Modern Monetary System" tool is tremendous.
ROTFLOL!!
Let me paraphrase "rpcas" main point. "NZ doesn't have to worry because this time it’s different". This has to be the most dangerous position I have seen on this blog. I would have though the “we can just inflate out way out of it” camp would have packed up and left by now.
Oh and BTW Hyperinflation has hit the US. The True Inflation rate from 2000-present is well over 200%. It was 25% just last year. So by all means keep drinking that logical fallacy Kool-Aid.
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Precious of you to accuse someone else expounding 1890s economics when you're an advocate of neoclassical economics. Itself a product of the 1890s. You're the one stuck in a time warp since you like most commentators aren't cognisant of the changes wrought by the monetary revolution of the 1970s.
Yes - it became even more deeply flawed than before. It allowed the USA to accelerate the process of it's ongoing default via monetary inflation which precipitated a lot of the mess we are in today.
A return to gold is emminently justified. If you need support for that position to be provided by a leading economist, look no further than this:
As J.P. Morgan said "Gold is money, and nothing else". Or as Greenspan put it before he took leave of his senses “In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
The economic situation in the USA is not even remotely consistent with the other hyperinflation cases. You can build a bunker and buy some rocks but at the end of the day, the USA will continue just as it always has.
Inflation currently over 25%? I suppose your metric of inflation is simply gas and commodity prices, right? Ha! Inflation is measured by the CPI, which is in the low single digits. The price of the biggest purchase most Americans ever make is still falling (house prices). Note - I didn't deny quantitative easing has encourages speculation in equity and commodity markets - I agreed with that - I merely said that it is not "printing money", which if you understood reserve accounting (you don't though) you would agree with.
Your a typical fear-monger that makes many predictions but never explains why his past ones are all wrong.
The USA is effectively in-solvent.
Consider,
1) It is spending more than it earns and its Govn is living in fantasy land if it thinks it can carry on like this for decades...
2) It is totally reliant on cheap plentiful oil
3) It is importing more, and more expensive oil it cant pay for except via debt.
4) What has it got to sell? it has all but exhausted its internal raw materials so the best it can do is steal via IP and "free trade deal" laws...or via its financial industry.
Conclusion unless it gets its act together really quickly like within 5 years it will do a Greece.
regards
1. Nonsense. There is no such thing as a government "living beyond its means" when everything it buys is purchased with dollars it creates from thin air. As Warren Buffett recently stated, "The US will not have a debt crisis of any kind so long all bonds issued are denominated in USD".
2. Agreed.
3. Nothing to do with debt.
4. It doesn't need to sell anything.
Conclusion: There is not a chance it will end up in an even remotely similar position to Greece. You don't understand the differences between a currency issuer (USA) and a currency user (Greece).
Some people ( not you , Troy ) ..... spend so much time sucking in Bernard's daily dose of gloomsterisations , that they lose track of economic reality . The USA is still a powerful economy , and remains the world's largest economy , with 3 times the GDP of # 2 , China .
........... and America has a 100 year supply of oil available to it , just to the north . Canada supplies more oil to the USA on a daily basis than any other country .
Just a few facts , to get us all back on the straight & narrow !
Yes , people forget that the USA contains a rich variety of metal elements and of fossil fuels . She has abundant farmland . A technologically advanced , highly educated population .... and even a democratic process . Property rights are rigourously upheld . And hospitals have equipment and drugs at the leading edge of their industry . There is the world's largest entertainment industry esconced in America too . And if you're peckish at all , the greatest companies within the fast food and soft-drinks industry are there too , and a Starbucks coffee to round out the meal .
....... but if steven and his ilk choose to delude themselves otherwise , about the USA , then that is their folly .
I agree. I'm not sure why disagreeing with modern finance is somehow "Anti American". I'm American and I simply do agree with such a large ponzi schemes and have sought green pastures elsewhere. I believe that US has devolved into a Kleptocracy that has abandoned the rule of law. Every recent Supreme Court ruling, every pro bank legalization that is passed and every decision that the Obama administration has made has moved the US away from its core founding principles and into a new paradigm. The desperation to keep the status quo is permeates everything. I once said a few years ago that you will know the end is near when entitled white people start to riot.
People can quote the major players in modern finance all day but it doesn’t make that particular world view right. There was a time in human history when slavery was socially acceptable (still is in some regions of the world). But we have somehow moved passed that as a society. So just because a majority of society acts in a certain way and everyone seems to be doing it doesn’t make it correct.
“Inflation currently over 25%? I suppose your metric of inflation is simply gas and commodity prices, right?”
What would you have me use as a measure of inflation, near earth asteroids strikes? The CPI hasn’t been an accurate indication of inflation for well over 30+ years. The CPI, just like GDP, has devolved into nothing more than propaganda tool. It’s an outmoded relic of a bygone era. No true economist worth their salt uses CPI anymore. I don’t know, maybe you prefer to measure inflation with iPads. Personally I only measure inflation in things people need not in things that people want. I you look a commodities and energy prices across the board they all have the same exponential pattern. So if it is not inflation or QE*insert number here* then what is it then?
The US is currently experiencing the same style of Hyperinflation that Argentina experienced in the 90’s. They are seeing inflation in everything they need and deflation in everything they own. It’s going to say that way till they finally decided to get off the pot. The only thing keeping the US floating is that Oil is still traded in USD. The USD is essentially backed by oil making it the currency du jour in a crisis. That is why commodities such as wheat or oil are actually excellent measures of true inflation while iPads are an excellent measure of productivity.
Interesting things happen when you dive into the real numbers. While True inflation rose 200% over the last 11 years the value of the NZD has only increased by 70%. So in essence the value of the NZD hasn’t raised at all, in fact, it still has the same purchasing power in did in the year 2000. For the NZD to keep pace with current hyperinflation the trading value should be $1.35 NZD/USD.
You can believe what you like, but your completely wrong and ignorant. You can bet on USA hyperinflation, the world ending in 2012, UFO's bombing us all.... whatever you want to bet on. Good luck with that.
However, the evidence shows that inflation is still very low in the USA, and in fact deflation remains much more of a concern than large inflation. The mechanics of a QE transaction (http://pragcap.com/mechanics-qe-transaction) show that it is merely just an asset swap, and is not "printing money" - Ben Bernanke quoted this. The evidence also shows that the most common original causes of hyper-inflation are foreign denominated debt (the USA has none barring a minute amount of currency swaps), currency pegs, corruption, faltering tax system, and regime change.
I have an acceleration clause on an adjustable alt-A rate with an floating amortization schedule date with an annual percentage rate of 10% and an appraised value of an assumable mortgage with a balloon payment bankruptcy bill of sale bi-weekly mortgage on a bridge loan with a buy down call option cash out refinance certificate of deposit clause…should I fix or float?
When you look at core inflation its still about 2% and in fact showing signs of dis-inflation...it is far more likely with very high un-employement that we will see the USA lead us into Deflation and Depression, provided of course the imploding Eu doesnt do that first...
Quite simple, its looking a matter of some months, maybe 2 or 3 years, we get to see fairly shortly who is right.
regards
BTW I would be happy to explain what predictions I got wrong about and explain why I got them wrong if you can please tell me which ones I got wrong. I make very very few “predictions” here. And the ones I do make I back up with investing in those “predictions” with my own cash. Most of my returns have been well over 150% ROI. Since I haven’t lost money in a single “predication” I have made here I would love to hear which “predictions” you feel I’m wrong about.
The only current predictions that are on the table that I’m aware of are 1) the Australian housing bubble will start popping in March (which it did) and 2) oil prices will be back below $100 by July ( which it is).
And the official US CPI is devoid of all credibility - see http://www.shadowstats.com/
Reserve accounting is simply a fancy name for sleight of hand, and QE is money printing.
Rubbish PDW. I thought you above all would be smart enough not to believe in the fairytale called democracy. What government actually got held accountable for not actually delivering on election promises. I don't know any. I certainly can't imagine it happening in New Zealand. Especially given how dumb the New Zealand electorate is.
''I couldn't believe a Government could be re-elected on these indicator numbers,'' a Western diplomat said. ''Nineteen percent inflation, unemployment at its highest point in history, real incomes down. Just about every number that could be wrong was wrong.''
At the time of the election, interest rates stood at 22 percent and unemployment had climbed to 6 percent in a country that had in the past enjoyed almost full employment. Interest rates and unemployment have since come down a bit."
http://www.nytimes.com/1988/02/24/business/new-zealand-is-jolted-by-a-speedy-decontrol.html
Legal tender laws are antithetical to the idea of a free, just and prosperous society (although I fully agree with PDK and others that we need to radically change our concept of prosperity). A sovereign monopoly on the creation and issuance of money is tool of oppression, and the basis for the seemingly endless expansion of government.
Surely the best (financial) insurance is to retire debt?
Although I suggest that in a 'financial meltdown', electronic underwriting will probably go the way of the dodo, so maybe it's not worth worrying about either the debt, or insuring yourself.
Physical self-reliance - call it sustainability if you have to - has to be the best 'insurance'.
I aggree that we seem to be sleep walking over an abys, but to me insurance is akin to shuffling the deck chairs. It just smooths out the consequences without fundamentally addressing the root problems. I sincerely hope that we draw back from the position where the government takes responsiblity for bank failures and the responsible citizens of the country wear the consequences of the irresponsible actions of the the banks, government and speculators; as per the PIGS. Better to take the line of Iceland and let the chips lie where they fall. They had the worst financial indicators in the world, but they are past that now and moving on. I suspect that the rest of the world will wallow arround in this mess untill they start taking it on the chin and address a few of the fundamental issues. I would not be surprised if the current unrest in the Middle East and Southern Europe escalates to revolution proportions and they finally decide to wipe the slate clean all round, and move forward. However if they do not address the underlying issues we will just drift back into the same mess.
Who could you take out insurance with? What counterparty could survive an even bigger GFC and pay out on the insurance? If the entity you're insured with collapses you won't see any money. It seems to me to be a pointless exercise.
So I'm in agreement with powerdownkiwi here. Build up self-reliant communities to weather the economic storms and avoid frittering resources and time away on worrying about vague financial possibilities.
It's a silly idea. For a start, where would the money comes from....if it's taxes then that would hammer an already depressed recessed market and drive unemployment to Spanish levels...so taxes are out...which leaves what...Edwards is another in the mold of Bennett...full of ideas that go nowhere fast...
This journey leads to a piigs (why do so many leave out Italy!) mess. It can go nowhere else because of attitudes prevailing within the NZ culture. The govt is a reflection of this culture.
The current debasement smile and hope BS policies are all there can be. If Key does not suck up to the benefit users, he is out. Labour know they can never return to power until National stuff up and in the mean time they must continue to offer handouts and fatter benefits.
How many times must the point be made....this shite we are in is the slope on the other side of the bubble wrapped up in useless govt. The Chch situation is NZ in miniature. Had the CCC started three decades ago to force the cbd property owners to meet building code plus conditions or demolish...and said NO to residential sections on bog land...the current crisis would be far less serious and far fewer people would have been killed and injured....but the heritage..."oh our lovely old buildings...oh the poor wee things...we must keep them"...yes that crap took centre stage and things were left another day...another decade...on and bloody on.
Welcome to NZ....where things are left until tomorrow and if you want some money all you need do is complain that life didn't turn out roses for you...the govt will solve the problem...just be sure to vote for the benefits handouts and pork.
Good ideas, I'd thought Edwards' Woody Allen analogy was tripe and he shouldn't be paid, however, his recommendations are very similar to the common sense suggestions made time and again on this site and elsewhere:
"They could include increased capital requirements for property lending, limits on loan to value ratios and an increase in the Core Funding Ratio that makes it more difficult for banks to borrow from hot foreign money markets."
RB has made 'baby steps' on the first two of these and I assume you have misquoted him re. the increase in CFR Bernard (can you check pls) as modifying the numerator of the ratio is required to make, "it more difficult for banks to borrow from hot foreign money markets." as presently there is no funding origin stipulations in the CFR.
Ok, pay him, good ideas, similar here:
http://www.johnwalley.co.nz/147-price_or_volume.aspx
"The CFR would be more effective if it specified a percentage of funding that must come from domestic sources. This would prevent efforts from the banks to lower their borrowing costs using different instruments such as covered bonds. There is also the potential to vary the CFR across the business cycle to supplement the cash rate mechanism."
"A LVR approach is not a tax, it does not increase costs, it promotes saving and prudence, and it would help improve property and affordability, especially if the LVR was varied across the business cycle and asset and purchase type. For instance the LVR might require more equity for investment property than a family home."
And NZ paid Edwards how much?
Why do we continue to ignore home-based common sense suggestions?
Cheers, Les.
ALL GOOD IDEAS sergeant Bernie, you've got the ingredients. Now bake the cake.
Conjures up an image of the sergeant major, having assembled his platoon on the parade ground, asks for volunteers, willing to do some some task, to step forward on the command of 3. On the command of 3, all the members of the platoon except one, snap to attention and with military precision step back one pace.
Assume you are Cyber-Prime of NZ, what political steps would you implement to bring about your ideas. It needs vision. Authority. I challenge you to suggest a list of candidates who you consider would have the vision and courage to lead on this quest. Who would you choose?
Bernard says: "The government should impose a tax on foreign capital inflows or a tax on wholesale financial transactions"
Correct
The AUD and NZD are (virtually) joined at the hip in that AU and NZ are both viewed internationally as politically stable countries .. which leads to .. last weeks announcement the Russian Central Bank will pour USD $5 billion into the Australian Dollar in a move to diversify its reserves and shift away from the US dollar. The Russian Central bank isn't investing in business activities or infrastructure beneficial to AU. It is "parking" its funds. Do you think any of that will find its way into NZ? Of course it will. This week, in your top 10 you noted the $120 billion of money that has been laundered out of China. You asked the question, has any of that found its way into NZ. Of course it has. China has been shifting its reserves out of USD into EUROs. Thats currently an unstable proposition. Where to next? Guess. Note there is no comment on where middle-east petro-dollars are going. They're very quiet. They won't be sitting on their hands, being left behind. Where is the money going?
What is noticeable is the absence of public data about foreign currency inflows, where it goes, what its used for, and how long it stays for.
"...take back into public hands the extraordinary powers of credit creation and intermediation and issue any currency needed to alleviate contastrophy and spend it into circulation without interest attached."
Who are you talking about Parky.....who would have these extraordinary powers....please don't tell us you would trust any of our current pollies..or those long dead....you really must answer this question Parky.
Thanks for your comments Iain which I always find interesting. Assuming "rpcas is your classic private banker" surely it is interesting to know what that thinking is? I don't know whether he is or is not but it is important to know the language. There is too much ranting and raving on this site and nobody, apart from Bernard, seems to come up with good ideas. But Bernard always gets shot down in flames. One thing I want to know, and you might like to explain it to me Iain, what is the difference between printing money and borrowing money overseas? Often the word "inflation" is screamed for printing money but surely the same effect is achieved by borrowing money? Surely it depends on what the money is used for. To me borrowing to consume is bad but borrowing to create is good. Then the question becomes if we borrow from overseas to create why can't we print our own money and lend it at an interest rate which comes back to the taxpayer (instead of an overseas lender) as well as the loan. Please don't scream socialism and the overseas lenders and the falling of the NZ$ as the Wollys of this world do because ALL economic thought is politics. Our NZ$ will fall eventually even if we do nothing. The price of everything will thus increase but that creates opportunites here. But doing nothing means the worst outcome of all.
I rarely shoot Bernard down.....
What ever you think doesnt really matter as in effect what happens is what counts in the real world.
In its simplest form prinitng money puts more money into circulation which debases the currency and causes inflation, its simply what occurs. So no we cant simply print money, if we do it becomes worthless and especially overseas. The problem with inflation is really once its out of the bag its very hard to stop, you cant just do a little, the effect soon wears off. Its like a junkie need ing a fix and soon its way out of control.
You dont need Iain to answer this, there is lots of info, google and youtube are your friends.
regards
But printing money is what we did in here 1935 and it was lent to build things and was paid back with interest. NZ's overseas funds were spent on the things the things that couldn't be manufactured here. NZ recovered from the Depression much more quickly while Europe depended on the War to recover. As I see it your arguement of inflation is based on the uncontrolled printing of money. Now we have uncontrolled overseas borrowing by the Banks and the effect is the same. Surely it is better to print money and control where and what that money is spent on than uncontroled borrowing from overseas. As an excample of what I would like to see is every house in NZ having solar water heating. The Government would lend each household the money to have it done with a lien on the house so that loan would be paid back with a nominal rate of interest when a house was sold. Now what is wrong with money being printed for such a purpose. It would employment and a new hydro station would not have to be built.
Pat you are correct that private banks bloat the supply of money and contribute to inflation and they need to be controlled and Bollard rather late in the "game" is moving to control them. Also, yes the NZ govt played with printing to pay for building state owned stuff in the 30s.
Where you go astray is in not recognising the dangerous path govt printing leads to...I do not trust NZ pollies not to use the power to print, to buy elections. You know dam well they would do this. At an electoral level it means which polly in your electorate is promising to build the most in your electorate!...or promising to print to increase benefits across the country.
You keep your expensive, limited life solar system Pat..I'll stick with wood burner and wetback. My wood is 'free' but for labour, time and some vehicle cost. The same is true for the whole of the WestCoast, much of the south island and vast areas of the north island. Why not use the unemployed to plant forests of firewood and boost the use of woodburner wetback systems?
Patrica can you show some evidence on "printing money is what we did in here 1935 and it was lent to build things and was paid back with interest." ?
eg Who was it lent to?
Recovered from the Depression, again cite reference please....there are a lot of factors as to why we recovered...laying at the feet of printing is probably a bit of a stretch. Im happy to read, Ive been studying the Great Depression and Im hardlt finding anything on NZ.
Uncontrolled borrowing by the banks, yes....that has caused a price bubble in housing, which is about to burst....the RB is now starting to control it...Printing and controlled, trouble is its not really controllable...
Solar heating, while I can sort of agree, as an engineer there is one big problem, the orientation of the house's roof has to be more or less correct and its location, ie Invercargill is probably a total loser, Auckland and North of it a winner...also its more debt, last thing I want is more debt.
Take the recent govn funded heat pump (and insulation?) scheme, a few installers I talked to said they could bump their prices up and did because they had so much work....to the extent the Govn grant % was removed....that isnt efficient...
Like Ive said printing is normally inflationary....its simply what happens....
If we go back to your claim taht in 1935 the Govn printed than is the situation of a liquidity trap printing may not happen.
What you are in effect asking for is QE'ing.....what appears to be happening as a result of the US printing is inflation and bubbles in many developing nations and commodities....in effect the US is exporting un-employment and starvation.....Once (if) a recovery starts then that money that was QE'd will almost certianly become serious infational and probably very fast.....of course because the USA is the World's reserve currency they are sort of getting away with it...but others are paying for it.
regards
The rest of the world was not particularly interested in what a little country at the bottom of the world was doing. Upon election in 1935 the Government nationalised the Reserve Bank, they then instructed the Reserve Bank to make 5,000,000.00 pounds worth of credit available for housing purposes. (This was to be available to the local Bodies and the Ministry of Housing). It was not allowed to be sold to the Trading Banks (cf US QEs) The return was to be 2% based on the life of the house which was estimated to be 60 years. I think you will need to go back to Hansard from 1935 onwards to see what else was done Steven.
@Anarkist
First I don’t subscribe to a particular economic school of thought. I think most are wrong. If I had to pin my economic philosophy down in would an Anthropogenic Centric Monetary philosophy. I believe the most economics foundations are riddled full of wild assumptions that have no basis in reality. I do not believe in rational actors, the efficient market hypothesis, GDP as a metric, or inflation based wealth growth.
Also, are you referring the monetary revolution that has led to the very peril the world is in now?
"I do not believe in rational actors, the efficient market hypothesis,"
I fail to understand why anyone can believe these at all..... GDP I think has some use as an indicator, but you are correct in not taking it literally I suspect. It just looks so fiddled, the biggest is really it takes no obvious and accurtae account of debt, so better GDP today against lower GDP in the future paying it back....
regards
Well it appears I'm in good company though your scoffing at rpcas who out of any other commentator here has the best handle on how the modern monetary system works, belies your claim. (And Wolly no I'm not rpcas. He and I share many of the same views but this doesn't mean we're one and the same).
What most commentators are guilty of is casting blame on particular factors for which they have an axe to grind rather than accepting the economy reacts dynamically to a complex array of interacting forces. Depending on the proclivity, its the governments fault, its the bankers fault, taxes are too high, or wages are too low, the exchange rate is too high, theres too much regulation, theres too much speculation ad naseum. Both sides of the ideological spectrum are guilty of this.
Too bad we're of the few who ascribe to inflationless wealth growth. Most people don't care even if they believed it possible.
"In his most recent column, George Will continued the false legend concerning Volcker, noting that he and President Reagan whipped the inflationary dragon with contractionary economic policy that resulted in double-digit unemployment. Will’s thinking resembles that of our present Fed Chairman who labors under the retro view that growth is the cause of, not the cure for inflation. The truth about Reagan vis-à-vis Volcker when it comes to inflation is a bit more nuanced."
http://www.realclearmarkets.com/articles/2008/02/the_paul_volcker_myth.html
Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply.
http://blog.mises.org/13120/krugman-and-the-long-depression-myth/
We can agree, then, that during these years of falling prices "people said there was a great depression." 'Beales,however, follows Giffen's view that the wail of distressd did not come from the mass of the people, who were for the most part better off, but mainly from industrialists, merchants, and financiers, who felt the pinch of falling prices, profits, or interest rates, and who were best able to make their complaints heard."More recently Rostow has supportedt his view.7T
The Great Depression in Britain, 1873-1896: a Reappraisal
"Also, are you referring the monetary revolution that has led to the very peril the world is in now? "
You think that the world is in peril now? It pales in comparison to that faced by the United States and Great Britain in 1968.
"Harold Wilson's Labour government came close to launching a financial coup d'etat at the height of the 1968 financial crisis.
Brian Walden, then a backbench MP, says the "mad plan" would have involved forbidding foreign travel, banning any cash from being sent abroad, effectively seizing pensions held abroad - "a virtual financial coup d'etat"." http://news.bbc.co.uk/2/hi/special_report/1999/01/99/1968_secret_history/244316.stm""
http://news.bbc.co.uk/2/hi/special_report/1999/01/99/1968_secret_history/244316.stm
IN EARLY 1968, THE MOST SERIOUS ECONOMIC CRISIS since the Great Depression shook the Western world.
www.jstor.org/stable/2170396However imperfect the world's monetary system is now, its far better able to withstand financial storms than the truly inflexible, ossified, one which prevailed before the 1980s reforms. HaH Ha
However imperfect the world's monetary system is now, its far better able to withstand financial storms than the truly inflexible, ossified, one which prevailed before the 1980s reforms.
Yes, but remember the creation of the Euro currency was a significant step back in the pursuit of worldwide financial stability. Had the Euro not been created at and had all Euro nations kept their own sovereign fiat currencies, Greece, Portugal, Ireland etc wouldn't have the problems they do now.
The possible longer term solutions to the Euro crisis are:
- political integration, a sort of "United States of Europe"
- peripheral nations such as Greece exit the Euro
@Anarkist
I have a firm grasp of the modern financial system. I have understood its fundamentals for well over 30+ years. But just because I understand it doesn’t mean I’m an advocate. I also understand the logical fallacies that are the basis and the foundation of the modern finical system. Please do not take my lack of quoting those that support the modern financial system as my ignorance. I just don’t agree with them.
The idea the somehow the US will never suffer because they can print their way out any crisis is the asinine logic I have ever heard. So when I hear Warren buffet and his ilk saying statements supporting that world view I can only shake my head. It doesn’t take much to make people lose faith in a currency. Once it hits a critical mass then things rapidly spiral out of control. Unlike some of the Nay Sayers here I don’t believe the US will collapse in chaos. Sure there will be wild swings and probably some violence but for the most part life will continue until the leadership finds the next Bretton Woods agreement to keep the wheels spinning for another generation or two. I would expect the next agree to be called the Honolulu Accord to signify that the economic capitol of the world has now shifted to the middle of the Pacific.
Losing faith in a c currency is just one of more than half a dozen ways the US could lose control. Countries could stop buy US-T Bills releasing the bond vigilantes. The large Banks could implode. The war effort could bankrupt the treasury or a combination of all the above could transpire. My point is from a “gaming” perspective the odds of the US coming out of this unscathed are extremely low. Too low, in fact, to bet on them, I personally give them a 1 in 50,000 chance of recovering without any drastic action. Those are the same odds of an asteroid destroying the Earth in any given year.
And before you think I’m here to cheer the merits of the gold standard you would be wrong, I don’t not support the return of the gold standard ether. The gold standard is fraught with danger too. A fiat currency is acceptable as long as there are sever legislation controlling it use. The US had appropriate legislation in place for well over 20 years until they dismantled both the rules and governing bodies to enforce them. While most Libertarians believe regulation is prone to capture I also believe the government is susceptible to corporate influence. I have thousands of years of evidence to show both are true. So a stable fiat based monitory system is a high wire balancing act that needs many checks and balances.
"I have a firm grasp of the modern financial system. I have understood its fundamentals for well over 30+ years."
"Countries could stop buy US-T Bills releasing the bond vigilantes."
"The war effort could bankrupt the treasury or a combination of all the above could transpire".
You quite obviously don't have a firm grasp on the modern financial system. The two lower statements contradict the upper one.
Ouch, thanks Wolly. Keep your own handbag to yourself. Fancy being compared to Thatcher. The only thing we have in commen is our shared concern about global warming. Yeh it was Margaret Thatcher who first raised the issue on the international stage in the early 1980s. Some claim that they had less than charatible reasons for doing so. For example to destroy the power of the miner's who have always been the stalwarts of organised labour.
"But the threat to our world comes not only from tyrants and their tanks. It can be more insidious though less visible. The danger of global warming is as yet unseen, but real enough for us to make changes and sacrifices, so that we do not live at the expense of future generations."
http://www.margaretthatcher.org/document/108237
Whether she did or didnt (and it seems she did), she was a formidable opponent. A very intelligent woman, when she did things it was because they made sense ie were logical....unlike Ronald Reagan for instance....She dominated the period, given her opponents in the UK Labour party were ineffectual, Michael foot for instance who couldnt get a damp squib elected, maybe that wasnt so hard for her. The biggest challanges she faced were from the likes of Arthur Scargill who wanted democracy destroyed (an out and out communist) and used his union to try and do so........those were not pretty days...
http://www.youtube.com/watch?v=aSrBO4_qPzo
regards
@rpcas
Mr. Modern Finance himself (Alan Greenspan) basically came out and admitted the US is destroying the dollar (i.e. exporting inflation). So you might want to dust off you econ books a read up some more. Better yet just throw them in the trash since they are worthless.
Hi,
In terms of history what I am finding is some of the best (probably) insights on what is happening to us or will happen is being talked about by economic historians.....
Friad this isnt what Im looking for....
"monetarypolicysomequestionsandanswers.pdf" was interesting though.
regards
Debt, credit.....yes from what I can read this was the problem then, and is the problem we face now, Steve Keen's work for one seems pretty inequivocabile. It seems highly intelligent men like Gordon Brown, who even with the very best of thoery and qualifications fail abysmally in the real world and have doomed us to decades of misery.....He'll probably get a Knighthood for it...
:/
regards
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