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Eco- Economy: Alchemists should depart the stage

Eco- Economy: Alchemists should depart the financial stage

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Time to for the Alchemists to depart the financial stage


By Adrian Picot

Scoop readers are invited to guess the source of this quote from the Book, New Zealand 2001, published in 1981….

"...We either accelerate economic growth (with the short term costs associated with that) or we accelerate the migration of skilled New Zealanders. While we have fantastic advantages and opportunities, we run the risk of arriving at 2001 with an average standard of living little better than at present, with large amounts of overseas debt, with high levels of unemployment, with a highly uneven distribution of wealth and with most of the skilled and enterprising New Zealanders living abroad ..."

It is from a younger Donald Brash who at the time was chief executive of Broadbank and would be appointed Governor of the Reserve Bank of New Zealand seven years later. Dr Brash is a very successful career economist and public figure, but unhappily his own fearful prediction (which he probably hopes has disappeared from public consciousness) has become all too true, with a few extra twists and negative indicators.

In 1981 Don Brash could have blamed Muldoon or any of the incompetent National and Labour Finance Ministers of the preceding 50 years. Now much of the blame for New Zealand's current economic basket case status lies with him. He is not totally alone - there are the cheerleading Treasury economists, radicals in the Labour and National parties (who later formed the ACT party), the Business Roundtable, and a venal finance industry that keeps the poor in economic bondage while growing rich looting the public purse.

The main problem with Brash's stewardship is his obsession with the destructive technique of using interests rates to suppress inflation. What has happened to the man who wrote 20 years ago :

"...it is also beyond doubt that high interest rates tend to have a highly deleterious effect on investment activity, especially investment in long term projects such as hotels, pulp mills and even houses.... "

In 1981, Brash stated that slow growth was the main reason for New Zealand's economic problems. But every time economic growth has started to get a decent head of steam, with the slight raising of prices and wages that such prosperity creates, Brash has raised the rates bringing any recovery to a shuddering halt.

Wealth is not actually created by investment, but by intelligence, hard work and the finite resources of the planet. When interest rates are raised they act as an impediment to businesses and workers who as a rule depend on money borrowed to stay afloat. Basically Brash attacks the wrong target.

The New Zealand experiment has proved to be a complete failure by the criteria explicitly defined by the main controlling bureaucrat.

One of the reasons given for raising interest rates is that it dampens the money supply and somehow puts a brake on rising prices. This is complete fallacy - the extra money that the majority of people and businesses pay in increased interest rates does not go into a vacuum - it goes into the bank accounts of people who already have money and who are more likely to purchase goods from overseas, which is the root cause of New Zealand's inflation.

Moreover the indexes used to build inflation figures do not include bank interest - yet this is a huge part of a large number of New Zealanders monthly bills. Every time the inflation rate goes up the cost of living goes up. Naturally interest rates are not included as part of the cost of living. That would completely give the game away for the sham that it is.

Any increase in wages will be matched by the banks in increased interest costs. After a while they might go back down again, but in the meantime the finance industry will have soaked up the extra lolly.

Historically, there have been other reasons for putting the interest rates up. One that used to be put about, but doesn't seem to get much currency these days is that we needed high interest rates to attract investment from overseas. Quite why we need to become more indebted and lose even more control of our strategic industries is a moot point. The net export of profits from New Zealand is more than $NZ6 billion dollars per annum. This represents $NZ6000 per working New Zealander.

Another fantasy is that the Government can control the money supply. This might have been possible in a more regulated environment where the finance industry did not virtually print money as they do now. The truth is that the Reserve Bank is powerless to control the money supply. The Reserve Bank has recently confirmed that more than 98 percent of New Zealands dollars have been created by private banks, and that more than NZ$50 billion has been created in the last 10 years, doubling the money supply.

There is a historical parallel for the current activity of the finance industry - that of the alchemists who laboured to produce gold from base metals. They never succeeded.

But our modern finance industry have managed to produce wealth beyond the wildest dreams of the alchemists. There is virtually no control on creation of money by banks so they have gone bananas and the world is awash with dosh.

Finance industry people like to adopt a posture of correctness and mathematical rigour. However this does not survive any intelligent scrutiny. Treasury forecasts invariably fail to predict such important events such as the Asian Tiger meltdown and our current currency collapse. George Bush Sr. in one of his rare lucid moments called monetarism 'voodoo economics' and he was right on the money. There is probably no relationship between the total amount of money and the production of actual goods and services any more. In fact money, as a commodity, is traded to a far greater extent than anything else, possible more than everything else put together.

The main source of inflation is the greed and undisciplined antics of the worldwide finance industry, fuelled by brainless and pointless artifices such as futures and derivatives which are basically forms of gambling.

Brash is an un-elected person in a position of huge responsibility. This is wrong. Decisions on economic direction should not be make by staff from the Treasury and the Reserve Bank; they should be made by elected representatives based on recommendations from experts, like the rest of the Government. The Labour Party appears either unwilling or unable to grasp the fact that Brash's policy is bad news for the battlers who make up the bulk of their constituency, and there seems to be no mechanism to remove him from office. There is a word for that - dictatorship.

New Zealand's economic problems are so long term and so problematic that merely twiddling with the interest rates doesn't cut it as a policy any more.

As usual, none of this is debated by the uncritical and slavish New Zealand media which seems besotted by the finance alchemists and their wacky economic theories. The TV news still faithfully report the stock market with funny background music, under the illusion that the 1987 collapse and subsequent widespread disgust with the finance industry never happened. The official media line is that people who want to reform the current dysfunctional economy and resultant social breakdown are envious or deluded. I wonder how many countries are envious of our teenage suicide and pregnancy stats or the huge numbers of children who turn up at school without any breakfast and so cannot learn.

We will be stuck with the current situation unless the Coalition government find enough bottle to sack Brash (or his hand picked successor) and the Treasury mandarins who have wreaked so much damage upon our economy.

There are two Acts of Parliament specially made to prevent the Reserve Bank Governor from being controlled by politicians. These must be repealed and some measure of control and accountability restored.

Recent events have revealed Brash to be a busted flush. The relentless descent of the dollar to new lows cannot be stopped by his favourite trick of raising interest rates because that would take the economy from the sickbed to intensive care. Dr Brash has been given stewardship of the New Zealand economy and by his own well-defined standards has failed. Any person with a shred of honour or decency would do the decent thing and resign but of course, we will not see Dr Brash do this.

The defining of the Fifth Labour Government will be if they sack him and vigourously reform the finance industry. It would take real courage, intelligence and cunning on the part of any politician committed to taking on these guys and giving the ordinary New Zealander relief from crippling mortgage rates and and shonky public finance. Such a person, if they succeeded, would have the mana and love that New Zealanders have for Colin Meads, Peter Snell and Sir Edmund Hillary - such is the odium and contempt that citizens have for the finance industry.

There is an alternative. Local currencies and responsible financial institutions like the Grameen bank show the future of financial planning and distribution. There is no rational reason for the Government's monopoly on currency, which works in favour of big business and the finance industry. The work of Dr Finlay Thompson and Deidre Kent points the way out of the big black financial hole that the alchemists have dug for us and represents a ray of hope for the regions where all industry has been closed down and the farms are not economically viable.

It is up to citizens to see these ideas for the lifeline that they are and facilitate them, otherwise we are doomed to several generations of servitude and powerlessness in this paradise for the rich and stupid.

- AUTHOR NOTE: Adrian Picot is an advocate for finance industry reform.


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