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Hickey on fighting the currency war

Written By: - Date published: 10:30 am, October 7th, 2010 - 15 comments
Categories: Economy - Tags: ,

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.

15 comments on “Hickey on fighting the currency war”

  1. prism 1

    ” We shouldn’t leave the guidance of our economy to the invisible hand of blind, fallible, and valueless markets.” Not forgetting predatory. Is it wasps that will puncture grapes, suck out the juice and leave the depleted fruit hanging looking good from a dstance? That will be us, may be is already proceeding. Or perhaps the analogy is Nauru, mined for its riches of fertiliser and now facing stones all around and stoney-eyed financiers.

  2. Draco T Bastard 2

    The tragedy of the commons isn’t the only example of market failure;

    Actually, The Tragedy of the Commons is a perfect example of the irratinality of the free-market. Add rules and that tragedy won’t happen (if they’re followed and enforced). The neo-liberal paradigm is to remove the rules which, of course, ensures that the tragedy will happen. The other point is that the psychopaths will try to avoid the rules or, if in a position of power, will write the rules in such a way so that they don’t work or benefits them in some way, i.e. Nationals’ ETS, the repealing of the Glass-Steagal Act

    …and climate change crises because of markets’ failure to react to the long-term problems they’re causing.

    “The market” will use up resources as fast as possible with no thought about tomorrow. This is partly due to its propensity to use everything available now and partly due to the profit motive where the sole purpose is to accumulate as much money as possible and the money is accumulated by using up resources.

    The neoliberal mantra has always been that the government shouldn’t pick winners.

    Of course that’s what they say – that way they can game the system. If the government actually did what was best for society then the capitalists would lose the wealth that they’ve accumulated as well as the control that they have. And we would, of course, have a viable economy that actually helps the people.

    It’s time to drop the neo-liberal paradigm. It doesn’t work, it never has worked and never will work. We also have to become self-sufficient and so does every other country in the world.

    • nzfp 2.1

      He Draco

      Add rules and that tragedy won’t happen

      Change/add the rules and you change the game – which means we can change the game to make “winning” socially, environmentally and economically beneficially to all of us (including the biosphere we live in).

      Capcha: ACHIEVED!

    • djp 2.2

      >>The tragedy of the commons isn’t the only example of market failure;

      This is a total clanger, the tragedy of the commons can only happen when there is no market. Note the word “commons”, how can there be a market when there is no private ownership.

      It seems to me that Marty uses this (misplaced) point to argue for govt intervention and then spends the rest of the article showing the stupid govt interventions (I agree they are stupid btw) going on around the world today (mercantilism, printing money etc).

      Come on guys (as Jane Galt said):
      1) People are often stupid
      2) Bureaucrats are the same stupid people, with bad incentives.

      • Bright Red 2.2.1

        the problem of the tragedy of the commons is that individuals making rational decisions at an individual level will cause a problem at a colelctive level that comes back to hurt them all.

        The individual cowherd has an incentive to have as many cows as possible on the unregulated field. They overstock it and the cows starve.

        That’s a problem of individuals in a market acting for themselves with no colletive authority to make sure they don’t screw up.

        Marty’s point is correct.

        • djp 2.2.1.1

          I think you are mixed up Bright Red.

          Either the cowherd owns the property (in which case he will take care of it), or the property is designated “commons” (probably by some govt bureaucrat) and it will fall foul of the “tradgedy of the commons”.

          Compare for example the state of your home toilet with a public one.

          • Bright Red 2.2.1.1.1

            the private property system is one way to deal with the particular situation in the tragedy of the commons. What it is important to realise is that the private property system is a form of collective governance. Private property rights exist in as much as they are recognised and enforced by a governing body.

            It is only by organising collectively (perhaps to create private property rights, perhaps by creating collective rules/laws) that the tragedy of the commons, where each looks after himself in an unregulated, free-for-all environment is avoided.

          • Colonial Viper 2.2.1.1.2

            In fact, when it comes to things like water coming down the river, or air quality, commercial interests have no problem dumping into or exploiting the resource as much as they are able to. Circumventing or removing regs as far as possible is an example of this behaviour.

            Compare for example the state of your home toilet with a public one.

            The widespread mindset of property oriented individualism – I don’t own it so why should I be careful with it, keep my litter off the beach etc.

          • Draco T Bastard 2.2.1.1.3

            Compare for example the state of your home toilet with a public one.

            And that wouldn’t be an example either if the people paid enough in rates to ensure that the toilets were properly maintained. It would also help if the children were taught just where the resources were coming from for that toilet and it’s maintenance that way they may just stop destroying them.

      • Draco T Bastard 2.2.2

        The “commons” is a set area were anyone can use it within a set of rules. It’s not privatisation that stops the tragedy as argued by the economists but the rules which always accompanies it. Privatisation actually ensures the tragedy as it also removes the rules and the oversight by the community. This is seen in our farms where the rules governing the farms are close to non-existent (voluntary regulation) and there’s no real oversight anyway. The result is the massive degradation of our natural ecology, pollution of our rivers and usurpation of our water to profit the individual farmers.

        And Jane Galt was obviously an idiot to come up with such simplistic nonsense.

    • jimmy 2.3

      It makes me laugh how some of the commenters on Hickeys page still think the govt shouldnt be picking winners when not picking winners is just the same as picking winners (i.e. not doing anything is just the same as doing something, someone wins/looses regardless).

    • Jeremy Harris 2.4

      The neo-liberal paradigm is to remove the rules which, of course, ensures that the tragedy will happen.

      Actually the neo-liberal paradigm is to remove the commons…

  3. nzfp 3

    Great post Marty,
    I like this comment particulary:

    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.

    American Economist and Chief Economic Policy Advisor for the Kucinich for President 2008 campaign – Professor Michael Hudson made similar statements and gave warnings about Australia and Malaysia in a speech he gave in Australia in late 2009

    “Michael Hudson — Historical & International Perspective of the Global Economic Collapse”
    Source: http://reformthemoney.blogspot.com/2010/03/michael-hudson-historical-international.html

    At 1hr 10mins 25 seconds into the speech, Hudson comments on alternatives to the US dollar as an international medium of exchange when he describes a meeting with former Malaysian Prime Minister Dr Tun Mahatir bin Mohamed. Mahatir stated that it was not a good idea for Malaysia to build up international reserves because:

    … having international reserves is like having an oil well for a predatory army, in this case George Soros and the speculators. A country with international reserves, is just going to be a sitting duck for speculators to raid the currency and empty out the reserves into their own pockets by corporate trading and derivatives trading …

  4. Colonial Viper 4

    Thanks for picking up on this and writing such thorough commentary Marty.

    Now, lets start thinking about what a world would look like which is aimed at helping people and communities thrive. One which doesn’t rely on unsustainable, ever increasing mounds of interest bearing debt created money and psychologically destructive consumerism/individualism.

  5. nzfp 5

    Oh Marty,
    You are soo insightful. You state:

    “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?”

    That is because we are living in the same economy as pre-20th century – before the economic reforms of the social democrats as advocated by the classical economists such as John Stuart Mills, Adam Smith, David Ricardo and of course Henry George.

    All of these economists recommended a tax system that placed the burden of tax squarely on land and economic rent and removed the burden from labour. The result was that land and labour costs decreased because industry didn’t need to include labour tax (income tax) into the costs of production, the economy had more money flowing as labour got to keep the majority – if not all of the fruits of it’s labour. The Government could fund itself from the tax on resource and land rents.

    This was the basis of classical liberalism, liberating labour and industry.

    With the advent of neo-liberalism (anti-liberalism) we got the complete reverse which puts us back in the same place we were before the social democratic economic reforms of the classical economists.

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