Bernard Hickey continues his politico-economic rebirth. Yesterday, he wrote on how New Zealand can protect itself from dangerous international capital flows that undermine our economy and our ability to choose our own path. We shouldn’t leave the guidance of our economy to the invisible hand of blind, fallible, and valueless markets.
the efficient market hypothesis has been proved wrong. We can’t trust our companies, our banks and, ultimately, ourselves anymore.
The point is that individual ‘rational’ actions of corporations and individuals can sum up to negative outcomes that ultimately come back to hurt everyone. The tragedy of the commons isn’t the only example of market failure; we’re in the middle of simultaneous and inter-linked financial, sovereign debt, resource, and climate change crises because of markets’ failure to react to the long-term problems they’re causing. Yet we have signed over the direction of our economy and with it our society to markets that we know to be short-termist and prone to mal-investment (like bubbles).
We now face international currency wars, mass money printing and the eventual restructuring of the global currency landscape, possibly with a changing of the reserve currency guard from the US dollar to something else.
The Institute of International Finance, which represents 420 financial institutions in 70 countries this week called for a new ‘Plaza Accord’ or Bretton Woods Agreement to restructure the global currency system.
It’s clear something failed and something will change in global currency system, whether we like it or ignore it or not.
We’re going to have the largest revamp of the international capitalist system since Bretton Woods at the end of World War 2 (which set up institutions like the IMF and World Bank). Brazil says it’s already in a ‘currency war’ trying to keep its exchange rate down and others are going to join in as they try to keep their exchange rates down. Why? Because it makes exports more competitive and decreases imports, which supports domestic growth. This is known as a ‘beggar thy neighbour’ strategy because countries are trying to improve their trade balances at their trading partners’ cost. It’s a race to the bottom, as countries try to undercut each other in a vicious and unsustainable cycle.
Countries will engage in ‘quantitative easing’ (printing money) to lower their exchange rates. This is inflationary, of course, which has the side benefit of reducing the real value of previously issued government debt – governments will ‘inflate away’ their debt but the cost doesn’t disappear, it is worn by savers and results in less faith in sovereign debt, which means higher borrowing costs in the future.
How do we cope in this world, which looks more like the pre-20th century international system then what we’ve come to think of as normal and natural in the last 60 years?
If the New Zealand dollar surges under the weight of capital inflows from carry-trading, yield-hunting investors and those hunting for safety away from the money printing, then the Reserve Bank needs to be ready to sell New Zealand dollars. It worked before in 2007 and made the taxpayer a tidy profit. It can work again…
…The Reserve Bank then decided to set the banks a target for how much of their funding should come from long term and stable sources, rather than the shorter term and unstable ‘hot’ CP markets.
This target is the Core Funding Ratio, which says banks must have 75 per cent of their funding from longer term bond and local term deposit markets by midway through 2012. The interim limit at the moment is 65 per cent
This has forced the banks to reduce their reliance on ‘hot’ money and hunt harder for funding from local term deposits, pushing these rates up sharply relative to the Official Cash Rate.
This simultaneously has encouraged more local savings and less foreign borrowing. It essentially forces New Zealanders to save locally to repay foreign debt through the banking system.
So what’s wrong with lifting the Core Funding Ratio to 90 per cent or even higher? It would make our system safer and make our economy less vulnerable to another freeze on international capital markets.
During the end of the boom, The Reserve Bank couldn’t get the housing market and inflation under control because of the huge inflows of ‘hot money’ that were, paradoxically, attracted by the high interest rate the Reserve Bank set. Increasing the long-term capital ratio is a far better way to control inflation without being at the mercy of foreign speculators.
Next, we need to keep our real assets ours, as they become increasingly sought after in a resource-poor world:
Right now nations with large capital surpluses and those looking to diversify out of US dollars are looking for hard, food-producing and commodity-producing assets in stable, easy countries such as New Zealand and Australia.
The Australians have repeatedly blocked foreign attempts to buy strategically large chunks of gas and iron ore. We should do the same, if only to prevent the influx of foreign capital looking to exit the devaluing currencies from boosting our currency and destroying our export sector.
We should have a proper debate about it. This week Harvard University’s pension fund bought the largest dairy farm in central Otago with nary a squeak of debate, unlike the case of the possible sale of Crafar Farms to the Chinese. Let’s do this properly….
One of the problems both old and young New Zealand businesses face is a lack of local capital to fund either growth overseas or ownership succession at home.
All too often the easy option has been to sell out to a foreign company. In many cases this has either led to a steady drain of profits and dividends offshore or the loss of technology and expertise.
One solution is to require New Zealand fund managers, particularly those receiving a government subsidy of sorts through Kiwisaver or controlled by the government in the form of the NZ Super Fund, to invest a certain portion of their funds here.
What we need is a New Zealand Future Fund, comprising money from the Cullen Fund and other government funds, Kiwisaver, and other private savings, with a mandate to buy and hold assets of strategic importance to New Zealand, both here and abroad.
If New Zealand is going to be able to afford to support an ageing population and keep its higher skilled youth paying taxes in this country then we need plenty of interesting and highly paid jobs.
The NZ Institute’s excellent ‘A Goal is not a strategy‘ report highlights how New Zealand needs to prioritise development of high skilled, high value export sectors such as Information, Communications, Technology and Niche Manufacturing rather than low skilled and low value jobs in local services, commodity exports and low value tourism.
We need more software engineers and less night porters.
The neoliberal mantra has always been that the government shouldn’t pick winners. Well, the market has proven woeful at doing it. When you look at it, governments actually have a fantastic record in infrastructure investment and fostering innovation. Why shouldn’t we, through the democratic process, choose the path we want for the economy, the same way we do for the health or education systems? It’s time we woke up to the power of government. Total Crown spending equates to nearly 50% of GDP. In conjunction with tax and labour policies, the aggregate demand of the government has the potential to direct the economy in the right direction, if politicians are willing wield the weapon.
I should point out that I don’t think Hickey has become a Leftie. I think he’s just woken up the the economic realities that we are facing and concluded that leaving the steering of the little boat called New Zealand through these stormy seas to an invisible and incompetent hand is madness.