The US and Europe are printing money to dig themselves out of a hole. Therefore we should do the same.
The difference between both of those giants and New Zealand is enormous.
Let’s take the easy one first. The US is the world’s reserve currency.
Despite best efforts by the Euro and prior to that the Japanese Yen, and that both in hindsight look laughable, the USD remains undisputed king of the reserves with very occasional but ephemeral competition from gold bars only. That gives the US policymakers an edge over every other policymaker on earth.
They can print money and there’ll still be a demand, people have to hold it for international transactions purposes. And contemporary co-conspirators of this monopoly are the Chinese and every other mercantilist regime that wishes to control its foreign trade by pegging its currency to the USD.
No matter how much money the US prints the Chinese and others will buy it in order to keep their currencies from appreciating against it. What a luxury for the US – it has financiers of infinite resort. While that lasts the US is different.
Now to Europe. As we all know the bloc is in the dock because it forgot to enforce fiscal unity upon its members when it embarked on monetary union in 1999. Instead, after the GFC the governments stepped in to take over the bad loans of their banking sector thus compounding the track record of fiscal imprudence they’d already established over the previous decade.
Junk bond status was accorded some members’ government bonds. Unable to pay the interest, and unwilling to enforce sufficient austerity and higher taxes, those members won their campaign to have the ECB “print” money by buying their crap bonds for euros, and lending directly to enfeebled banks that remain. This is all in the name of “saving the euro” and in the short term it has bought time. But that is all.
Until Spain and Italy can recapitalise their banks without adding to their already massive sovereign debt then economic growth and fiscal balance will be out of the question and the risk of significant further contraction of those economies is high. Their denial is being funded by Europe printing money but that is a stopgap only, their economies need capital inflows to stabilise, and that’s most unlikely given investors realise insufficient fundamental adjustment is being undertaken.
If we want more economic growth of a permanent kind we need to have products and services to sell that the world wants
So let’s come to a small and pretty irrelevant economy like ours. Say we unilaterally decide that economic growth just isn’t strong enough so we enter into the race to the bottom by printing NZD and lowering our exchange rate. Foreign creditors and potential investors look at our external debt ratios and simply see they’re of similar proportion to those of Spain, Ireland and Italy. Why would they line up for more? The only reason would be if they thought that by extending our debt we would enhance our ability to service it and pay it back.
Now look at what we did with the last dollop of external debt raising. Into property it went in the main, lifting NZ property prices to some of the highest in the world compared to income. And what are we all aware of again right now in our economy? Isn’t it that the property market is champing at that bit to get going again, the only thing holding it back is our banks can’t get access to easy offshore loans like they once could. Their masters require higher collateral on mortgages.
For us there is little to no credibility in a policy to achieve growth from printing money. It will simply lower our credit rating and raise our interest rates as creditors extract the required reward for largesse.
No, if we want more economic growth of a permanent kind we need to have products and services to sell that the world wants. Only that way will investment or loans from abroad be more forthcoming.
Every time this comes back to policies (tax and financial) that don’t discriminate in favour of housing speculation, and that do encourage capital inflows because we have rising sales of products to the world. Remember the commodity boom we had recently?
After 30 years of economic growth fixes being gerrymandered by politicians ordering up the printing presses, global investors with governments around the world owing them trillions, now recognise a sham, a scam, and an also-ran.
Economies with intelligent policy settings targeted to deliver better deals for the global customers of their firms will reap the most rewards over the next decade.
Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his new blog garethsworld.com and is reprinted here with permission.