The NZ Initiative's Jason Krupp argues mining could help bolster regional NZ economics

The NZ Initiative's Jason Krupp argues mining could help bolster regional NZ economics

By Jason Krupp*

Sitting in one of New Zealand’s urban centres, it is tempting to look across the various data points and conclude that all is well with the country. Yes, dairy and log prices have pared back substantially over recent months, but almost every other economic indicator is improving, holding its own, or lingering below warning levels, as in the case of inflation.

Yet this is a temptation that needs to be resisted. Dig below the headline numbers, and you will quickly see a two-speed economy: one part urban and thriving, the other rural and stagnant.

The explanation for this divergence can be attributed to the forces of globalisation, agglomeration and mechanisation.

The returns to skills in large centres have increased. Highly skilled workers in the cities, mainly employed in the services sector, have done well. But rural New Zealand has been hit hard. Industries such as timber milling, manufacturing and meat processing – cornerstone employers in many countryside communities – are no longer economically viable, and have either moved elsewhere, or shut down. Drops in transport costs combined with returns to scale in processing have concentrated that kind of work in a smaller number of centres.

As these jobs have dried up, economically active people have moved to the cities, turning an existing cycle of slow rural decline into a vicious circle, one that concentrates ageing in the provinces.

But can we do anything about it?

The answer is tricky, but part of the solution could be to increase the contribution of mining to the economy.

Mining is, by definition, more resistant to globalisation since companies have to come to the ore. And New Zealand has a rich mineral endowment, with significant deposits of gold and silver, coal, industrial metals, and non-metallic minerals onshore, while offshore there is huge potential to expand the scale of oil and gas extraction.

Furthermore, the strength of New Zealand’s institutional framework, ranked among the best in the world, suggests the country is well-placed to deal with, or at least significantly mitigate, the negative environmental and macroeconomic side-effects that come with high levels of mineral extraction.

Readers may ask: “if it is such a good idea, why hasn’t it been done yet?”

That is a question that will answered on Monday, 1 December, when the Initiative launches Poverty of Wealth: Why minerals need to be part of the rural economy, which outlines the regulatory impediments that have prevented rural New Zealanders from tapping the wealth underfoot.

The report will be available for free download on our website. We look forward to discussing our findings with you.

*Jason Krupp is a research fellow at the New Zealand Initiative.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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(1) Is it renewable?
(2) Is it sustainable?
(3) Does it optimise value chain?

If you are proposing propping up your failing system by ripping more raw materials from the ground and pawning them off to the lowest bidders (ie the commodity system) because your economic system doesn't provide a "feedback path" to the rural world and your cities are consuming too many resources to be sustainable... then you will be doomed.  Cities fill of people moaning about economic survival and environmental sustainability...but NIMBY eh...

Oh for christs sake, how long have we been doing mining, centuries, and yes one day, one century, we'll be done, and probably sitting on another planet by then. God help the negativity.

Yes Grant A but with mineworks historically limited in scope and scale due to very real constraints such as lack of energy, primitive technology, and the financial risks involved. Traditionally only the lowest hanging fruits were exploitad. This limited the environmental disruption and allowed nature to recover in short timescales. Today resource companies are no longer faced with any of these drawbacks and with resource prices at historic highs resource deposits which were previously untapped due to them being too dispersed and uneconomic are valuable enough to be exploited. The capital investment required to access the resources is very disruptive. This is why mining is an entirely different kettle of fish compared to historic standards and should be the focus of intense scrutiny.

resource prices arent at historic highs.

What is at a historic the country which specialises in buying mine produce and selling overpriced mining gear...

A significant gold mine discovery might be valuable since gold forward markets are starting to permanently price in backwardation, thus making fiat money apparently worthless.
"It is interesting to note that benchmark gold-dollar swap rates have recently traded negative, meaning investors are paying to borrow gold. This is unusual as gold is traditionally used as a source of collateral for cash financing.... [A] number of factors may play a role, such as excess dollar liquidity or an increased demand for collateral on the back of the global regulatory developments." In short a gold shortage at the institutional, read commercial and central bank, level. And not just a shortage but the biggest shortage in history, judging by today's latest plunge in the 1 Month GOFO which just dropped to -0.5% and , worse, 1 Year GOFO that just hit its lowest print in the 21st century, and is also about to go negative: something that has never happened before further suggesting the gold shortage could go on for a long, Read more
A not to be dismissed article, other than by the ignorant, outlining the relevance of gold basis analysis can be read here.

and yet earlier this year mines were easing off production as real gold supply was overtaking real gold demand....

Or they cant get a price that is more than their costs, which I beleive is the case for a few of the big mines...

Bit more complicated than than Cowboy. As I understand it, and with a bit of luck Stephen will correct me where I'm wrong: the price of gold is probably being artifically depressed as demand is greater than supply for physical gold. That is the implication of the quote above.
The Chinese are hoarding the physical stuff but the price is set in the (presumably rigged) futures markets. China is the biggest producer but does not export the stuff. China is also the biggest importer. So physical gold is flowing at a rate of knots from West to East, aided by the low gold price (presumably rigged by the western central banks and their toadies so as to make their currencies' look more valuable than they really are). 
The concern is that, with western governments effectively devalueing their currencies as a matter of long term policy via inflation, there will come a time when the western finance system will hit a systemic limit of some sort. At this time the world monetary system will be forced back onto a commodity backed currency system and the gold in the vaults will be really, really important. It may be that China has as much as 32000 tonnes of the stuff already, as against the US 8000 tonnes. All this is shrouded in the deepest secrecy and layers and layers of disinformation, manipulation, and suspicion.
My personal take on conspiracy theories is they usually have some truth in them but it is not what people think. So, is there a potential problem here, my answer would be yes. Just don't assume you know what the problem really is.

The concern is that, with western governments effectively devalueing their currencies as a matter of long term policy via inflation, there will come a time when the western finance system will hit a systemic limit of some sort.
The melt-up in global “developed” bond markets is nothing short of incredible. German (0.70%), French (0.97%), Italian (2.03%), Spanish (1.90%), Portuguese (2.84%), Austrian (0.84%), Belgian (0.92%), Irish (1.38%) and Dutch (0.82%) yields all traded to record lows this week. With debt (GDP, my correction) surpassing 130% of GDP, Italian 10-year yields at 2%? French yields below 1% - with a huge debt load and big deficits as far as the eye can see? Japanese yields at a record low 0.41% (federal debt-to-GDP exceeding 250%)? What on earth have central bankers done to global markets? It’s worth noting that U.S. long-bond yields Friday fell below the October 15th “panic low” level, closing at a 19-month low 2.89%. Read more
At this time the world monetary system will be forced back onto a commodity backed currency system and the gold in the vaults will be really, really important.
That's exactly what the gold basis implies - one has to pay to borrow gold not the other way round  - gold is money and fiat money is just an asset to be financed by gold.

My own view is that the idea that "gold = money" was invented by bankers. They were thus able to lend to others in a form that the borrower could not create. This would be fine, except they went a subtle stage further and said the interest must also be paid in the same form. This is The Banker's Rort. It ensures that an ever increasing percentage of a society's wealth be transferred to the banking sector.
Visit one of the Rothschild's many palaces around Europe to get an idea of the scale of this and why there was such a vicious backlash. Communism and fascism were the backlash and we still haven't fixed the cause.
A fair system would be that the principal was repayable in the form in which it was borrowed but the interest was payable in such goods or services as the borrower was able to produce.
Debts are perfectly natural. If you grow anything you tend to have a surplus at harvest. People naturally create a web of obligations around them, you owe someone a pint, someone else a birthday present, someone else a dinner, someone else a day's help, someone else owes you a favour for something;  the list goes on.
Currencies are just virtual commodites that are more liquid than physical ones and serve as a score board for quantifying the web of formal debts. That's the theory I'm currently using as a working hypothesis anyway.

Roger - you have explained yourself very well - thank you.
It is a pity lots more people do not understand this as well you do
I have a gut feeling that gold will not be the answer but Bitcoin will.
If you look carefully at Bitcoin you will see this.
Money can be printed and printed and printed but Bitcoin has a limited quantity. As a result money constantly looses its value while Bitcoin constantly gains in value.
Money and Bitcoin are mirror images of each other but working in opposit directions.
True, the value of Bitcoin is volatile but that will settle more and more over time.
I believe it has a place in our future.

bitcoin has even less backing it than fiat.

Thanks Mike,
There are other money systems out there, one of them is Bartercard, another is green dollars. They are a tradeable version of trade credit. I used Bartercard for some years in my business - when I sell a product for Bartercard dollars I am creating the Bartercard dollars, when I spend them on someone elses goods the Barterdollars disapear again. I hear that a green dollar system came into widespread use in Argentina the last time their currency blew up.
The reference to the Rothschild palaces of Europe was because I happened to visit a minor one last winter - an extraordinary display of truly massive wealth on a scale we are not exposed to here.
My own guess about the way forward is as follows. Fiat currency is a virtual commodity created by governments. It is more flexible in its uses than a gold backed currency and if well managed can work very well. It is also vulnerable to gross abuse.
The debt problems governments get themselves into are when they borrow in a foreign currency. The curse of an IMF bailout is it lends in a foreign currency - thus trapping the recipient country in perpetual servitude. Government debt in its own currency is not necessarily a problem, it's an operational decision in the same way high interest rates are an operational decision for the RBNZ.
We have a massive debt bubble in housing caused by the RBNZ holding rates too low for too long feeding into a dysfunctional building sector. The RBNZ held rates too low for too long because Michael Cullen was running a surplus instead of reducing taxes and the Federal Reserve was forcing world interest rates down to help offset the mess the US had got itself into. At the time we thought we were doing the right things.
How to get out of the housing problem is simple in theory: Run a decent fiscal deficit; preferably by reducing taxes rather than spending more. That puts money in our pockets and allows the RBNZ to put interest rates up to a level that gently puts pressure on house prices. Over time our disposable incomes rise and the relation between house prices and incomes comes right.
Does this increase government debt? Yes, but government debt in its own currency is not the same as the debt we owe to the bank, it has different qualities. (Different dimensions if you are a physicist). Think of it as increased float. Better still call it government float.

When I reworked the quantity theory of money to account for interest - (M.V)+i=P.Q - the one thing that stood out when plugging numbers in is that interest rates will have to trend down over time. I don't have the financial market knowledge you do Stephen, but the meltup in bonds is no surprise to me. What is going to happen to gold once the reality of negative rates kicks in?

Can you give the definitions you have used for M, V, i, P and Q for your equation? I am interested to see it used to draw a conclusion, make a comparison or perhaps a prediction.

Same meaning as the original, Money, Velocity, Price and Quantity, but with the additions of "i" for interest. It probably needs a time component, but I prefer the simplicity of it as is. Time because one years interest has to be created in the next year.
I have been posting this for a year and a half now and you are the first to ask me that.
What you will notice is that there is insufficient money to purchase all of what is produced because of the money taken out of circulation to service interest. That is your redistribution of wealth, the surplus production being accumulated by those charging the interest. But what can also happen is that Price can increase in lieu of extra production, you could say QE is expected, the forecast is probably for hyperinflation.
Another prediction is that velocity will likely also drop over time, putting further pressure on prices.
In fact a whole host of problems arise that put pressure on prices, such as savings lowering velocity or a resource constraints causing a reduction in production.
I haven't thought about this all for a while but my guess is that we are currently in a phase where production is inelastic and this surplus production is keeping prices down. That can't continue forever.
The whole process can't go backwards without defaults. I will post some comments soon in a relevant thread on how this all affects the housing market.

But is money used to pay interest actually taken out of circulation? Surely people whose main income is from interest on TD's, bonds or other instruments don't just hoard those payments. Most would be spent. A portion is taxed and recirculated by government spending.
It's not like it all just falls down the back of the couch never to be found again.

Good question. The very act of a TD, Bond or other instrument lowers velocity. Where does the money come from to service the expected payments on these investments? The investment has reduced the size of the money supply just when it needs to expand to meet increased production to pay the interest.
You could think of the investment as the person charging interest, so parasitic. So it isn't all a select few bankers at the top, but also all those with investments expecting a return such as rental property. I haven't actually placed investments in this loop before so it takes my mind to some interesting places.

I still can't see how creating say a company bond lowers velocity. If Scarfie Inc issues a bond to fund expansion of widget production the bond money is recirculated as plant purchases and wages, increasing velocity. The interest is paid from profits on widget sales. The widget buyers fund their purchases over time from energy cost savings from scarfie's clever widgets.
I'm not getting the reasons for the assumption of lower velocity.

Correct when you talk about investment in production, but not when a non productive investment. It all comes back to the consumption of resources and ultimately finance (or claims on future production) will outpace production, I suspect they already have but we have to see it get acute before a collapse. My recent thinking is that asset stripping will take place before collapse. That is rather than take from production to pay interest, interest will be serviced from past production ie: the sale of assets.
I am talking in a global sense with the equation but to give this New Zealand context in answer to your question, residential mortgages comprise about 3/4 of our money supply with a further 8% in personal lending (2012 figures). That means only a maximum of 17% is available for productive investment. Housing of course being money like and definitely non productive.

Btw what started me down this track is the realisation that the right side of the Quatity Theory of Money is GDP. We assume it is all an increase in production, but this isn't necessarily so as price can distort the figure.
A big part of the equation is the consumption of resources to meet production needs. I have said here that if private enterprise won't supply it then eventually governments will have to do it directly.

I rather think that the right side of the equation is not just GDP, which is notoriously difficult to measure, but something more like Global Nett Perceived Value. "Value" is always subjective and something seen as an asset by one group may be perceived as a liability by another, but ultimately it is the balance of perception of value that has the greatest impact on the current price of anything.
Using your patent as an example. If GE or someone saw the device as just the thing for the (hypothetical) 10,000 rubbish burning power plants they intended to build they may offer you $100million for it. (drinks are on you that day, mate.) The $100m is transferred to you and they now have an asset they value at $100m. If it works, millions of tonnes of rubbish get transformed into usable energy and the Global Perceived Nett Value has increased.
I  suspect we have been underestimating the value of innovation, which is currently happening at an unprecendented pace.
Incidentally, after you receive the loot, there will be cries of "the rich get richer", when in actual fact everybody has got richer because of your innovation. 

Bernard put up something the other day to indicate that new innovation is slowing down. What I see is that major breakthroughs are pretty rare, but perhaps I am not looking hard enough. Interesting thing is when my technology was in a competition designed to help drive innovation the winner was someone that just perfected current technology, go figure. Still I got placed for innovation.
I think it is helpful to take a cue from your comments here about nett value, plus MikeB and Roger in this thread, to break innovation down into categories,. The important ones being what actaully results in a net benefit (after resources or rare minerals are considered) in increased production of food or energy efficiencies being the nirvana.
I advised someone earlier this year on the launch of their phone app "Triper" and "Linker". Glad to see they have at least launched but this young ladies idea of innovation is she writes a cell phone app and gets rich. I brought her down to earth by explaining that it is non productive and get ready for a 5 year slog to achieve her overnight success.

PS. Richard Duncan is one economist that explains the switch from capitalism to creditism by the creation of the Fed. The process was still in place before, just a hell of a lot slower. And keep in mind a gold standard still faces the same problems if interest is levied.

Yes some is taken out of the system if,
a) that Interest goes overseas, and I think quite a decent % is.
b) Its more disposable income that gets "re-invested" and not spent, maybe even overseas.
So some factor needs to be allowed for.

But scarfies equation seems to be looking at money as a global system, as indeed it is. If interest goes overseas, it is still in the system. Money invested always get used for something. Even if it is just invested in US Goverment bonds it is still being recirculated as bribes, kickbacks and politicians payment to hookers, amongst other things of course :)

Fair enough, but b) will still apply.
In a way its moot, go back to Scarfies message as the important thing.

Snodgrass T - Perhaps if you think of it like this.
I lend you 10 of my paintings for an exhibition you are putting on.
You have to pay me for the loan of my paintings
My fee for the use of those paintings shall be 1 of my paintings.
This now means you have to return my 10 paintings after the exhibition plus pay me 1 extra painting as a fee. That is i lend you 10 of my paintings but want 11 back.
But where are you going to get this extra painting from?
Well just as the bank owns the money you borrow, i own the paintings you borrow.
Huston we have a problem.

Jeez Mike that's a bit weak. You can do better than that. Doesn't make sense. Your paintings aren't currency, why  would I borrow them at an impossible to pay interst rate. Get real.

Beautifully put Mike. That is why the banker's originally came up with the idea that gold is money in my opinion. In contrast to the idea of grain debts (ie the goods and services you are able to produce yourself) as used in Babylonia.

Stephen,....    Are u reading to much into the gold basis...???  
Maybe it is  simply hedging activity... in what is a bear mkt in Gold...????
There are more factors than just interest rates ...that affect basis...

If I can sell my cash (spot) gold and replace it with futures at a lower price, let me at it.. Good delivery would be the only issue, so I can roll the trade.

I read ( reread I think) your Fekete link above last night and he is always worthwhile. A couple of points. My rework of the quanity theory of money makes it non linear, really the whole point of the exercise.
Secondly the warehouseman relation to the basis is worth exploring deeper as it is this issue that provides one example of why there are costs to holding an assett rather than lending it. In this instance the grain incurs the cost of storage, if you lend it you save those costs. Really opportunity cost is a bullshit argument, it is a fiction.

Mining gold is a waste of energy.  Energy we cannot afford to waste.

Talking of energy waste - our revered trading partners and those benefiting most are now investing in our country via the same banks that financed the following mess.
“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers. Read more

I agree, from what nzcoolie? said I suspect we are seeing the (start of) serious overflow into NZ of this chinese madness/desease.
Meanwhile no one wants to stop it, all seeing $s in their eyes.
until it goes ***pop***
then we all pay...

fact checker still out?
eg. Furthermore, the strength of New Zealand’s institutional framework, ranked among the best in the world, suggests the country is well-placed to deal with, or at least significantly mitigate, the negative environmental and macroeconomic side-effects that come with high levels of mineral extraction.
and Pike River never happened....

Perhaps he forgot?

What a jolly good idea, rip the country up to extract minerals that are in decline value wise, but never mind that, we will let some foreign corporation come in, pay a crummy royalty and let the real profit disappear out of the country.
Yep one light bulb moment that one.
If you want sustainable answers to provincial decline then I suggest you look to the 70+ woman in Eketahuna making a living from cheese making from 7 cows. It is there somewhere that the answer lies not in bigger, bigger, bigger

Are you kidding raegun?  You do realise that woman actually has to work and produce something of value. As the article states "most of the Highly skilled workers in the cities, mainly employed in the services sector, have done well."
As with most of us, urban and rural, who believe in more than paper/money shuffling we are relics of a bygone era.
Even if the mining was environmentally friendly (lol) most of the wealth dug up would be systematically transferred to a city of choice rather than stay in the provinces.

No I am not kidding, but I don't mean that everyone look at becoming small block farmers either, what I am saying is that small is the answer, not just getting bigger and bigger and bee essing everyone that you have to have economies of scale in order to be able to progress.
And yes, she has to work to produce something, but I bet you anything you like that she doesn't get up each morning dreading the fact she has to go to work

Sarcasm reagun. Totaly agree with the sentiment.

It's about making sure a larger portion of the revenue gained from extracted production from provincal and rural sources is returned via that channel.  However since small towns are debt owned, and money owned by cities and mob rule, having the real cost of production passed onto through commodities is always going to be unpopular.  the turnover of real production just takes so long.  (hence the profits redirected into prepackaged and preprocessed goods that can be just picked up off a shelf, rather than bespoke manufacturing or delivery - like is so much cheaper for large store when it can get the customers to cover the delivery cost...and in the Internet, to remove the storage and display cost altogether while oncharging P&P).  which is why I'm looking forward to Fonterra Chinese Infact Formula subscription service !   easily predicted, known volumes, on charge the P&P, pocket the middlemans profit while retaining more product control.

Yet more short termism, so when the minerals are all gone then what?