Eco-Economy: Dr Cullen Wants Financial Reform

One of the main problems with interest rates is that the impact of interest-bearing debt on inflation isn't directly measured.

All we get are changes to the Consumer Price Index. If the CPI goes up we get another dose of toxic interesttherapy that kills the economic body to reduce the debt cancer load.

Interest rate rises reduce the demand for new debt, slowing the economy as the extra debt system costs eat into whatever "growth" there was. Prices then have to be flattened to clear the market leaving both producers and consumers with declining real incomes.

The cancer symptoms are briefly masked. However, they promptly reappear when interest rates are reduced to pull the economy out of recession. Each relapse and interestherapy forms a business cycle, and with each business cycle the patient economy becomes sicker.

We are quickly heading towards the terminal buiness cycle where the economy becomes unresponsive to further treatment and dies from the abuse it has received.

This will happen when interestherapy, the use of interest rates to manage inflation, fails around the world, as it has in Japan. Think of Mitsubishi Motors as a flagbearer. Until now, countries like NZ the US have survived in part by deflationary borrowing on the current account, mainly from Japan and China.

In NZ, on my projections, total debt measured as domestic credit + accumulated current account deficit will double from $252b (March 2003) to roughly $500b in 2015 while nominal GDP will only rise from $129b (March 2003) to roughly $190b. Average interest rates will have to drop by about one third to keep the system afloat. In about 20 years the Official Cash Rate (OCR) in NZ will have to be near zero. We are unlikely to get get that far because the US will probably have gone under by then, dragging most of the world with it.

Against this scene we have the pathetic notion of NZ Minister of Finance Dr Cullen (National Radio 17th June 2004) trying to part the walls of the debt sea by continuing to reduce government debt.

In the debt system the deposits created through interest bearing debt ARE the money supply. And under the debt system the Government can borrow more cheaply than anyone else. In fact it could borrow from the NZ Reserve Bank for nothing. Government debt is far more efficient than private debt because it is cheaper. Any interest on it has less impact on the economy.

Thus, reducing Government debt in the present system is the worst of both worlds. At best it condemns the economy to greater inflation and more interestherapy. The cancelled Government debt has to be replaced by dearer private sector debt to keep the economy going. At worst it is outright deflation, reducing the money supply, driving the economy into the ground. People become less able to service their existing debt load with their more expensive deflated dollars. Hence the horror expressed at the deflation "D" word by people like Allan Greenspan who heads the US Federal Reserve.

NZ Government policy shows itself to be100% ideology and 0% common sense. Dr Cullen specifically wants to reduce government debt servicing and government debt as % of GDP despite those objectives contradicting the present debt system.

On the other hand, Dr Cullen, NZ and the world CAN easily achieve his stated goals. Debt servicing costs can be reduced by using low interest debt from the Reserve Bank. Government debt can be reduced as % of GDP by responsible Government use of debt-free issue. But, of course, those simple, common sense solutions, the ones Dr Cullen says he wants, fly in the face of the prevailing ideology!

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