Q+A: Shane Taurima interviews Russel Norman
Q+A: Shane Taurima interviews Russel
Greens unveil plan for quantitative easing – wants Reserve Bank to print billions of dollars to buy earthquake bonds from government.
Norman says creating credit to buy bonds would devalue the dollar, reduce overseas borrowing, fund Christchurch rebuild and re-stock Natural Disaster Fund (NDF).
Would start with around $2 billion in first round, then leave it to Reserve Bank Governor to gauge need for further QE.
Norman says “we don’t know” how much the dollar would drop after QE, but reckons a 15% drop in dollar value would be significant help to manufacturers.
Despite claims QE would raise prices, Norman says plan won’t be inflationary, as much of the Christchurch rebuilding is already happening and the NDF would buy assets offshore.
Most trading partners are using QE without creating inflation
“If we protect that [export] sector and enable those people to make money for New Zealand, then we keep the jobs in New Zealand and we stop building overseas debt.”
“Currency traders… assume that New Zealand is a one-way bet at the moment, because we are the last country standing operating orthodox monetary policy.”
Greens Co-leader: I have confidence in Mr Shearer.
Labour’s “got some work to do”, but “they’re aware of that themselves”.
On Dotcom: “Seems very strange” Prime Minister doesn’t remember the February briefing and says he needs to look at GCSB operations, as there’s no-one else to.
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Q + A – October 7, 2012
Interviewed by SHANE TAURIMA
SHANE Thank you, Dr Norman, for joining us.
DR NORMAN Good morning, Shane.
SHANE Before we talk about your answer, I just want to pick up on point that John Tamihere made, and I think— Let me quote him: “The front bench isn’t firing.” Do you agree with John Tamihere? Is Labour that bad?
DR NORMAN I don’t think they’re that bad. Obviously, you know, they’re only one year into the term. They’ve got some work to do. I think that’s pretty clear, but I think they’re aware of that themselves, and I think they are doing policy work in the background.
SHANE Do you think, though, it’s harming the chances of getting into government together? Because, let’s face it, Labour – you’re relying on them to get into government.
DR NORMAN Well, it’s early days. We’ve still got another couple of years till the election. The polls have actually turned around quite a long way, and I think this last couple of weeks have shown that the government isn’t invincible.
SHANE You have confidence in Mr Shearer?
DR NORMAN Yeah, I have confidence in Mr Shearer.
SHANE John Tamihere also made another point. He said we need to take a different approach, a new approach to help address some of these quite terrible economic woes we’re facing at the moment, and you have an answer to that. You have a plan. Tell us about that.
DR NORMAN Well, today the Green Party’s releasing a proposal around the exchange rate. As the introduction said, the exchange rate is overvalued. The International Monetary Fund says it’s probably about 15% overvalued. That’s having a very detrimental impact. There's three parts to our proposal. The first is, as was talked about in the introduction, around using the— broadening the Reserve Bank mandate so it doesn’t just look at inflation but also looks at the exchange rate. And that would mean that we could have lower interest rates, which would mean that we would have a lower New Zealand dollar. One of the reasons the dollar’s high is because there's a lot of money coming in from overseas in order to take advantage of our relatively high interest rates.
SHANE And the other two parts?
DR NORMAN And the second part is around looking at some of the housing-asset bubble. So capital gains tax, looking at supply side, making sure that we’re not getting a housing asset bubble which is sucking in funds from overseas, putting upward pressure on the dollar. And the third part is around adopting some of the measures which have been used overseas in the form of quantitative easing and applying it to the specific New Zealand circumstances. So we’ve developed a proposal which looks at using the central bank, the Reserve Bank, essentially creating credit and using that credit to purchase earthquake bonds from the government and hence reducing the amount of borrowing that the government needs to do, which also reduces some of the pressure on the dollar, because a lot of that borrowing is from overseas. And also using that Reserve Bank credit to invest in the Natural Disaster Fund, which is the fund we have to prepare ourselves for big earthquake events.
SHANE So you want the Reserve Bank to go out and print some more money?
DR NORMAN Essentially it’s around the creation of credit. It’s called quantitative easing. The idea is if part of the reason—part of the determinant of the value of the dollar is supply and demand, you increase the supply of your currency and then you use that to deal with some specific economic problems that you have. The United States has used it very extensively. Britain has used it. The Bank of Japan, the European central banks. All our trading partners are engaged in this kind of a currency convention.
SHANE So just so we’ve got it clear – you want the Reserve Bank to go out and print some new money to buy some earthquake bonds off the government. The government then would use that money to help with the Christchurch rebuild – help build the sewers and the streets and that type of thing – and also to go towards saving for our next disaster.
DR NORMAN That’s right.
SHANE In a nutshell.
DR NORMAN In a nutshell, and those earthquake— Because the government wouldn’t be borrowing for those earthquake bonds from overseas, that reduces the pressure on the New Zealand dollar.
SHANE So what will this do? Because any economist will tell you if you go out there and create massive amounts of money, it’s going to affect inflation. Prices go up, don’t they?
DR NORMAN Well, I mean, there's three responses to that. I mean, first, if you look at the last monetary policy statement from the Reserve Bank, it was right at the bottom of the band. There's not strong inflationary expectations going forward. Secondly, when you look overseas at the use of quantitative easing – because all of our major— most of our major trading partners are using it – it hasn’t produced major inflationary problems there. And then thirdly, the way we’ve designed QE or the proposal that we’re releasing today is specifically designed to reduce the inflationary effects. So if you look at the earthquake bonds, the earthquake building is happening already, so we’re not increasing construction activity. We’re actually just making sure that we’ve got the money to do it. And the Natural Disaster Fund, which is currently empty, we would be restocking the fund with foreign-denominated assets, which is— And it’s important to understand this – the Natural Disaster Fund is stocked with foreign-denominated assets, because in the event of a big disaster in New Zealand, you want access to those overseas assets. So once you start purchasing overseas assets with New Zealand dollars, you don’t add to inflationary effects inside the New Zealand economy.
SHANE How much money are we talking about?
DR NORMAN Well, if you look overseas, the amount proportionally is somewhere between 10% and 24% of GDP. That’s what our trading partners have done, and obviously that’s why the New Zealand dollar has risen is because our trading partners are involved in quantitative easing.
SHANE So how much is that?
DR NORMAN Well, if you did it in New Zealand, you’d do it in rounds. So it’s, if you like, an adaptive management approach. You would do, say, 1% of GDP, which is a $2 billion QE—
SHANE So start off with $2 billion?
DR NORMAN Well, you’d start there, and then you’d look at the effect. And so, you know, where that takes you is up to your Reserve Bank governor to look at the impacts of that kind of QE and make some kind of judgement about whether that’s sufficient in and of itself. Because it’s all in an international environment. Of course, the exchange rate is always relative to what our trading partners are doing.
SHANE And you said from the outset that you hope that this will bring down the dollar. By how much?
DR NORMAN Well, we don’t know is the short answer. We know overseas it’s had a significant downward effect, particularly on the US currency, and that’s resulted in a significant increase in exports out of the United States.
SHANE Because you said before that the IMF – the International Monetary Fund – said it’s overvalued by about 15%.
DR NORMAN That’s right.
SHANE It’s about 82c at the moment. 15% off that – that takes us to about 70c. Is that what you’re looking at?
DR NORMAN Well, you need to look at the trade-weighted index, not just versus the US dollar. Because what's important is looking at all of our exporting industries into all the different countries into which we export. So you need to look at the lot. So you can’t just compare it to the US. But if it came down by 15%, that would make a significant difference to our manufacturers. I mean, I think we need to look at the real-world economics of this. We can’t kind of— The government is trapped into an abstract theory about economics, which says, oh, you know, you mustn’t touch it, which was the idea from 20 years ago. If you look at the real-world economics—
SHANE But that’s the point, though, isn’t it? The government will say, well, you can’t really control it. It’s voodoo economics.
DR NORMAN Well, if it’s voodoo economics, then you need to say that to the governor of the Federal United States Reserve. You need to say it to the governor of the Bank of England—
SHANE But on that point, they’re at that point because their interest rates are almost at zero.
DR NORMAN And so that’s why part of our three-point plan is about bringing down interest rates as well. You need to have a coherent approach which addresses all the levers which you have available.
SHANE Let me quote you something—
DR NORMAN Looking at the international—
SHANE ...that Mr English says in response. Quote: “If you reduce the exchange rate, you reduce the standard of living for all New Zealanders.” End of quote. And what we’re talking about there, of course, is that a lower dollar means a higher cost of living for households, because going to buy petrol, used cars, TVs and about anything you get from The Warehouse, it all goes up in price.
DR NORMAN So if we follow Mr English’s logic, then we want a higher and higher dollar so that imports are cheaper and cheaper, lots of people get laid off because all the export sector gets destroyed, and we borrow lots of money to cover the difference. That is not a sustainable long-term strategy for New Zealand.
SHANE But the point is even if you do get the dollar down, you can’t keep it there.
DR NORMAN And so, just to answer your last question, what we’re trying to do is protect the export sector of the New Zealand economy. If we protect that sector and enable those people to make money for New Zealand, then we keep the jobs in New Zealand and we stop building overseas debt. Our overseas debt, our net overseas debt is now about 75% of GDP. Our current account deficit is 5% of GDP. These are not sustainable numbers. If the government thinks doing nothing is sustainable, they’re wrong.
SHANE Well, let me put that again to you, because if you get the dollar down, how do you expect to keep it there? Because you can’t, can you?
DR NORMAN Well, part of it— So, if you look at the impacts, part of it is reduced pressure from borrowing, so this government is engaged in a massive borrowing programme. They’re expect to borrow $50 billion, $60 billion.
SHANE Which you just told us about, but how do you keep it there, Mr Norman?
DR NORMAN And so by reducing the borrowing needs of the New Zealand government, you reduce that pressure. By restocking the Natural Disaster Fund, you reduce that pressure. And also – and I think this is quite important – changing the expectations of the currency traders is very important. They assume that New Zealand is a one-way bet at the moment, because we are the last country standing operating orthodox monetary policy. All of our trading partners have abandoned this policy except for us. And so it’s easy to make money out of New Zealand. So we change the expectations in the market.
SHANE Can I ask you will Labour support this policy?
DR NORMAN We have spoken to Labour and given them a heads-up about what we’re talking about today. I’ll be interested to see their response, but—
SHANE They haven’t said whether they support it or not?
DR NORMAN Well, what they’ve said is that they’ll look at what we’ve proposed and give some kind of considered feedback. I think we’re all on the same page, because we all read the international literature, to realise that monetary policy settings need to change to protect the real economy and real jobs, and I think Labour have said that very clearly. Because we all—
SHANE But no guarantee though?
DR NORMAN There's no guarantee, but we all read the International Monetary Fund statements. Even two years ago, the chief economist at the International Monetary Fund said small open economies can’t just target inflation. They also need to target the exchange rate with their monetary policy in order to protect their economy. That was two years ago. This government has not been listening to the international best practice.
SHANE And finally, I’d like to talk about Dotcom, because we know you’re a member of Parliament’s Intelligence and Security Committee, and I want to know what did you find out on that committee about Dotcom?
DR NORMAN So, this is one of the limitations of the oversight is the Intelligence and Security Committee is not a Parliamentary committee. It’s a statutory committee established by law. Under that law, we’re not allowed to talk about what we hear on that committee. So basically, I can’t tell you. What I can say is that that committee doesn’t look at operational matters and isn’t allowed to. And so that puts a real limit on what we can enquire into.
SHANE It sounds like you weren’t told much out of that. I’ll take that from that. So maybe it’s believable—
DR NORMAN (laughs) I couldn’t possibly comment.
SHANE Maybe it’s believable, then, that the Prime Minster wasn’t told much as well.
DR NORMAN Well, what we know is that the Prime Minister discussed at some length— After the Dotcom raid, he discussed Kim Dotcom’s residency, right? You know, it’s recorded in public. And then about a month or so later, he was told something about Kim Dotcom, on February 29th. He says he has no recollection of it, which seems very strange to me. And then, of course, he told us all that he wasn’t briefed at all, but it turned out that he was. What's the important point here is that where is the oversight over the spy agencies? It’s only the Inspector-General of Intelligence and Security who missed this and the Prime Minister. The Prime Minister is the sole democratic oversight of the GCSB. He has a very special responsibility. It’s quite different to a normal ministerial responsibility, which has oversight over a department. He actually needs to look at their operations, because there is no one else.
SHANE And finally, I want to ask you, because what do you actually want from this police complaint? We know an organisation can’t be charged. Is there somebody you want charged? Is it, for example, the minion who had the brain fade at the GCSB or the cop who gave the bad immigration advice on Dotcom that you want charged? Who do you want charged?
DR NORMAN Well, so an organisation can’t be charged under the Crimes Act, but individuals who breach the law if they’re employed by the government can be.
SHANE So which individuals do you want charged?
DR NORMAN Well, obviously we don’t exactly know what happened. So the only report we have so far is the Inspector-General’s report on what the Prime Minister told us.
SHANE But you want somebody charged?
DR NORMAN Well, what we want the police to do is to investigate what happened so that we can find out, because nobody, except perhaps the GCSB and maybe the police, know what happened. The Prime Minister doesn’t seem to know what happened.
SHANE And we have to leave it there. Thank you very much for your time.