Written By: Marty G - Date published: 6:29 am, November 12th, 2010 - 49 comments
Categories: capitalism, Economy, monetary policy, overseas investment - Tags: bernard hickey, exchange rate, fran o'sullivan
The US Government has begun ‘quantative easing’, which is effectively creating new money out of thin air, to inflate away the value of its debt and lower its currency to make its industries more competitive. It’s not the only country playing this ‘beggar thy neighbour’ game. Nearly all the major currencies are engaged in the ‘Currency Wars’ and we’re in the cross-fire doing nothing.
China and Japan have been trying to hold their currencies down for years – it was key to the economic development of them both. Since the global economic crisis began the US and the UK have joined in along with a few other countries. Together these countries, and the 20-odd countries that have their currencies pegged to the US dollar, represent a huge portion of the world economy. With all these currencies being pushed down, the handful of floating currencies that aren’t taking the same measures are finding themselves pushed to catastrophic heights (on a side note, I see the Aussie unemployment rate is rising again, undoubtedly linked to their currency being at parity with the US dollar).
New Zealand, the first and last neoliberal puritian, is one of the few ‘good guys’ leaving it to the market to set our exchange rates with intervention. And we’re getting royally screwed as a result.
Hickey explains the consequences:
A world of a permanently weak US dollar and the refusal of China and its neighbours to let their currencies rise vs the US dollar essentially sentences New Zealand to being a farm and tourist destination, and a foreign owned one at that as foreign investors look to spend their newly minted US dollar on hard assets in stable, food-rich democracies with proper legal systems.
Any manufacturer trying to sell to Asia, America or Europe would have no hope. Any that remain would have to focus on exporting to Australia, assuming of course the Australians leave their hands off and allow their currency to rise even further above US dollar parity than ours.
Some would argue that the world wouldn’t end if New Zealand had no manufacturing base exporting outside of Australia.
However, I think this would be a mistake. Manufacturing implies factories employing lowly paid manual workers, but in a modern sense manufacturing actually refers to higher wage jobs that will keep our youngest and brightest from leaving the country permanently.
The idea that we shouldn’t be a manufacturing country is nuts but it was a cornerstone of the neoliberal revolution. In the age of peak oil, having our own manufacturing base is going to be all the more important.
The Hobbit was a perfect example. Fisher and Paykel Healthcare and the other companies in the TIN 100 technology companies that produce NZ$5 billion in exports annually, just behind Tourism and Dairy as one of our biggest export industries.
These are the jobs and businesses we need. Can we really build incomes and repay our debts with the promise jobs on dairy farms pumping out commodity products or more jobs in cafes and hostels cleaning up after Australian tourists?
So what should we do?
There are plenty of ways New Zealand’s government and its Reserve Bank can try to stop our currency and high wages jobs from being stomped on by the elephants.
It could move much faster to reduce consumption and improve savings, reducing the need to borrow or sell assets in a way that pushes up our currency.
Introducing a capital gains tax or land tax would make a good start. Such a move to improve our national savings rate would also allow lower interest rates, which would encourage investment in exporting businesses.
We should be taxing things that can’t be shifted (like land) and things that are undesirable (speculation, pollution) and taking tax off things that are desirable (work and savings).
The government could impose limited forms of capital controls to discourage big lumps of freshly minted US dollars (or their proxies) from entering the country. Big farm and property sales to foreigners could be banned or limited. Other asset sales to foreign interests could be discouraged or blocked.
Selling your productive base is stupid. Your just giving someone else your profit stream forever in exchange for a bit of cash in hand. It should be a measure of last resort but we’ve been indoctrinated with this belief that foreign investment is vital.
New Zealand’s savings institutions, particularly the ones with government mandates or subsidies (the NZ Super Fund and the KiwiSavers funds), should be encouraged or forced to invest in New Zealand.
I agree. If we want a prosperious economy we can’t keep on borrowing the capital from overseas. We have to save and invest in ourselves.
Foreign investments in New Zealand government or corporate bonds could be taxed.
Government companies could be directed to buy goods and services from New Zealand companies.
It’s insane that SOEs are forced to make decisions purely on their own costs and benefits and ignore the wider impact on the government and the country. Kiwirail wasn’t permitted by Steven Joyce to build the new railcars itself and keep the work and tax revneu in New Zealand, instead it’s going for slightly cheaper railcars from abroad.
The IRD could be much more aggressive in forcing foreign owned companies to pay their fair share of taxes. Its success in forcing the Australian-owned banks to pay a fair tax rate sharply reduced our current account deficit.
Allowing Google to make $150 million of revenues in New Zealand and to pay just $7,726 in tax here last financial year would be a good place to start.
Can’t see that happening with National. If Google threatened to up and leave tomorrow, National would give them some of our dosh and change whatever law they want.
In a world where it’s every country for itself, New Zealand needs to look after itself.
All of these suggestions are interventions in the free market and they are specifically designed to put New Zealand interests first. The neoliberals scream that we shouldn’t pick winners (something even Fran O’Sullivan now disagrees with). We’re meant to play fair and leave it to the markets. Well, countries don’t become economic powers by playing fair and that is becoming truer by the day as the major economies retreat from free-market ideology and try to protect their own economies first. ‘Playing fair’ while everyone else is ‘cheating’ is a recipe for distaster.