“To be, or not to be, that is the question,

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,

And by opposing end them.”  Hamlet, Act III, Scene 1.

It seems, after nearly 30 years of deregulated markets, that we face a sea of troubles ourselves. An extreme global debt deleveraging is upon us, the numbers too outrageous to even consider. Not only have we consumed beyond our means, we have mortgaged our future. Whereas once credit was difficult to come by and banks conservative in their lending (can you pay this back?), the brave new world brought us access to unlimited treasures, all paid for on a credit system, which had limited restraint.

As financial models became more complex and debt could be packaged, securitised and sold off, all sense of restraint was lost. Who owed whom was lost in a parallel universe of metaphor: swap, hedge, collateral, obligation, repurchase. Repaying principal and interest, in the old fashioned sense was put to one side. Can you afford the interest? Don’t worry about the principal, that will pay itself off as the price rises! Can’t afford the interest? Don’t worry, we’ll lend that to you as well, or have a holiday (from interest that is….keeps charging but pay it some other time). Tick, tock, tick, tock.

Maybe Hamlet wasn’t as crazy as he sounded.

As I explained in a previous post on the Euro, deleveraging debt is a painful process. As debts are written off, the money supply contracts, causing a contraction in the general economy. This creates a spiral where demand for new credit drops and this causes further losses to business, resulting in more job losses and so on. Traditionally, this has been dealt with by the lowering of interest rates, which hopefully stimulate demand for credit and reduce interest burdens. Sadly, this doesn’t work until the overhanging debt has been cleared out, by which time unemployment has risen and economic output has contracted to severe levels.

The road to austerity is a self-fulfilling process. Clearing the debt mountain will take many years and, perhaps, like Japan, it could be a decade or more. During that time people will be unemployed, machines will sit idle and resources will be untouched. In the 1930s governments stood back, waiting for the miracle of the market. None came. That is not a road we want to travel down.

As the shadow banking system starts to fall apart, it is time to plan and look forward to building a stable and local supply of money to see us through the hard times. Continuing to rely on overseas capital and ever increasing borrowing is a road to ruin. Our gross debt will hit $90 billion  by 2016, according to Treasury forecasts. The government talks of returning to surplus by 2015 but that is very optimistic. Even then we will still carry this debt for many years to come.

So is printing new money and spending it directly into the economy a better idea? I talked about this in a recent interview with Kim Hill and Radio NZ National, which you can catch here.

RadioNZ National Kim Hill interview

I have had an incredible amount of positive feedback since the interview and, interestingly, from a very wide range of people. There were a few comments about “funny money”, including a little pop from Nevil Gibson at the NBR. My answer to that is if you think this is funny money, try explaining the nearly $4 trillion that’s been used to buy debt off US banks! The feedback has confirmed the following: that there needs to be a clearer explanation on how the money creation process actually works (even though the RB has published on this here), that inflation needs to be better understood and that people are extremely concerned about the way the financial system is structured. We will be working on producing a simpler explanation to those issues.

In the meantime, around the world, there is a lot of new work being undertaken around the quantitative easing process and how that is not really working. Sushil Wadhwani (Goldman Sachs and MPC member in the UK) and economist (and former colleague of mine) Michael Dicks have looked at more direct interventions into the economy, noting that QE is a very roundabout way of trying to stimulate an economy. They look at directing lending to companies from the central bank and, more interestingly, at simply giving households a voucher to spend. You can read the brief paper here. Their proposals are in the right direction but do not go far enough. Nouriel Roubini recently wrote that direct spending on new infrastructure in the US would be much more useful than simply buying toxic bonds off failing banks.

What’s clear is that more and more economists and policy analysts are realising that QE is a sop to the banks, boosting their balance sheets and stock prices, at the expense of the taxpayer. Clearly this is a misallocation (and perhaps misappropriation) of taxpayer funds. Furthermore, even with trillions of $ of QE, there has been no inflationary effects at all. This is important to note when considering the direct injection of new money, as we have proposed, for the Christchurch rebuild.

As I noted in this recent piece for ChangeNZ, as long as there is surplus labour and resources, there will be no inflationary effects from new money. This has been confirmed from business sources, who note the economy is limping along at between 33-50% of capacity. So there is little concern over the direct effects of the new money in raising prices. The indirect effects through the banking system are also likely to be minimal, given a very low demand for credit across the economy. Indeed, with debt deleveraging in full swing, we are likely to see further reductions in debt, offsetting any new potential demand for credit. Still, credit numbers will need to be watched carefully and, at the same time, it’s important to note that the amount we are suggesting is only $5 billion. Ultimately the goal is a strong and locally managed financial system with price stability. That is something we have not had, despite the continuing myth of a central bank induced low inflationary environment. The time is right to consider an alternative way forward.

Perhaps we should leave the final words to Hamlet, as we ponder the road ahead:

“The undiscovered country, from whose bourn

No traveller returns, puzzles the will,

And makes us rather bear those ills we have,

Than fly to others that we know not of?

Thus conscience does make cowards of us all,

And thus the native hue of resolution

Is sicklied o’er, with the pale cast of thought,

And enterprises of great pitch and moment

With this regard their currents turn awry,

And lose the name of action..…”

It’s been 10 days now since the amazing day that saw 700 people pack into the Aurora center to be inspired around the rebuilding of Christchurch. As one of the organisers it was a relief to see the event run smoothly and generate the kind of excitement and energy we had alway hoped for. This couldn’t have happened without a huge amount of support from a huge army of volunteers and of course a bunch of committed organisers. The photo stream is now up and shortly the videos will be going up. I can’t wait to see them and write about them individually though some have already here, here and here. For me, some strong themes emerged from the day which I think are worth mentioning.

- Cities are about people. That should be our first and foremost consideration.

- Community participation and engagement are key. Listen to the people and you will find out what they want.

- Sustainability. We need a city that is built to last. That means thinking ahead to what the future will bring.

- Innovation. This is a time to embed innovation into the new city. With so much creation ahead, it’s time to really bring this to the fore.

- Branding. It’s time to look beyond the Garden City. Let’s be known for something different, something new. Anything.

I’m going to start with Christchurch: the City of Innovation. That’s what we do. We are a city of ideas, inspiration and invention. We attract the best and smartest to live in our amazing city. We are a talent utopia.

What’s your branding for the new Christchurch?

Capitalism and free markets.

What a great idea. It’s a shame no one has actually tried it out or bothered to let homo rationalus economicus that it’s an urban myth. We operate mainly in a state sponsored system of capital markets underpinned by arcane and often opaque trading rules and regulations.

The provision of capital is key to any functioning economy and has been since the beginning of time. Each empire had its own approach to coinage to support trade and the governing class or head of state. The first pillar of modern capitalism was established in 1694 with the formation of the Bank of England. Thus began the first stirrings of the fractional reserve banking system and the modern financial system.

I’ve previously covered the many bailouts experienced by the banking system and the Bank of England itself and in some ways our current malaise is no different. The central precept of free markets is that they should operate on their own merits – caveat emptor.

I’m not going to discuss that fallacy here but focus on the problems of bail outs. Why should a failing business be rescued by the state? The simple answer to that is when it has implications for the national economy or issues of national security (often regarded as twos sides of the same coin). We have seen the fiasco in the US, the UK and Europe. We have seen the banking system bailed out, private companies bailed out and yet we still hear the mantra of free markets, trade and market liberalisation and privatisation repeated.

Here in NZ we have seen South Canterbury Finance bailed out and most recently AMI. On both occasions the government intervened to provide capital from taxpayers for businesses which had clearly failed. In the case of SCF depositors were guaranteed under a standard deposit guarantee framework but bondholders also benefitted to the tune of $350m. Those bonds should never have been covered under a deposit guarantee scheme. Investors enjoyed a big free lunch here at the expense of the taxpayer. In the case of AMI, the government intervened to support an insurance company who didn’t have enough reserves on hand post the February 22nd quake. The government could easily make a good case for supporting AMI, in terms of providing it with backstop liquidity but in doing so it needed to be very clear that it was suspending any belief in free markets.

The moral hazard is clear but the implications have not been explored. On one hand the government wants to bail out private companies who are clearly responsible for their own position. At the same time they want to promote policies like privatisation because, wait for it, private companies are more efficient than public ones.

It’s very clear that the neo-liberal dream is in tatters but no one seems to want to wake up and smell the reality. Market morality is indeed quite hazardous.

I was at University when the quake struck, eating my lunch and reading a paper on “Native Rights”. I didn’t hang about and immediately dived under the table as I didn’t like the look of the walls and ceiling lights flailing about like paper decorations. When the first shake had finished I headed outside quickly and sat down whilst the two big after shocks rocked the surrounding buildings. The University seemed reasonably unscathed……nothing like the CBD which is 5 kms to the East.

The damage of the Feb 22nd 6.3 shake is way worse than the Sep 4th 7.1 quake. No doubt this is due to the depth and the proximity of the epicenter. But this post is not about the earthquake, it’s about the economic impact and the re-building to come.

The cost of this disaster is only guessable at the moment. Numbers from $10 to 16bln have been thrown out but it could be anything. There is no doubt that this is a complete rebuild of the city’s infrastructure and central business district. Added to that is the viability of the eastern suburbs. They were affected badly and there will be questions over ground issues when it comes to re-building.

I want to go back to 1936 and the First Labour government which introduced low interest loans as part of a system of public finance to rebuild the country’s post-war economy. Think of it as New Zealand’s New Deal. The Reserve Bank governor can direct this at any time. This is certainly one possibility.

What I would like to see is fresh new money being injected directly into the economy by the government. The Treasury can action this at any time. The New Zealand economy has been struggling for a few years now since the GFC hit and deleveraging started. Business is struggling and cash is constantly tight. This latest quake will have finished off many business hanging by a thread.

I am proposing the Treasury create $5bln of new interest free money and credit it to the Government Earthquake Department for use in the rebuilding of public infrastructure. This is real money (not debt) and it will flow through into the economy thus giving it a boost as well as providing liquidity to the economy.

The money supply will increase by $5bln but I don’t believe there will be any inflationary risk. We are currently in a period of deflation and deleveraging with falling house prices and economic stagnation. NZ needs all the help it can get and there has never been a greater need nor a better time for this proposal.

It’s time for a New Deal. Please pass this on if you can.

Non-stop media coverage aside, it does feel like we are experiencing more frequent natural disasters. . Perhaps we should call them natural events since they seems to happen with such regularity that we should be very well prepared and learn to live with them. It was somewhat ironic then that the city of Christchurch should receive an international Civil Defence Award prior to the recent 7.1 earthquake. The response to the earthquake was very impressive from the Civil Defence HQ downwards into the community. Of course nothing is perfect and it’s probably telling about our level of expectation that some were unhappy about how the council handled things. The fact that no one died is quite incredible, due to a combination of strict building standards, low population density and the time of the quake. But what was of interest to me was how the city residents responded. There was a definite feeling of everyone looking outwards and willing to help. The fact that the city could get back on its feet so soon was testament to the resilience of its people.

So what makes systems resilient? Simply the ability to bounce back from a shock or unexpected event. Generally this is applied to ecosystem shocks: the ability of ecosystems to regenerate. But people can be resilient, in the way they respond to shocks such as the loss of a loved one. Communities can also be described a resilient if they can recover from an event which effects the whole community. More and more resilience will become a major part of any community planning scenario. Christchurch has done well in this area and I am sure lessons will be learnt from recent events.

When we look at building resilience into our systems it’s worth looking at the key stress points. During the earthquake a couple of these stressors became clear: one was money and the other was the exchange of  services. People needed to buy stuff yet with power down there was no way of paying via the usual channels and many people didn’t have cash on them. Also people needed to exchange goods and services but again there were problems with communication, power and availability.

It’s at a time like this that we see the promise of local community currencies come to the fore. One such system was the Lyttleton Timebank which operates in a small and geographically constrained community. This is a perfect setup for a successful community system. More and more these type of systems will become part of the fabric of a successful and resilient communities. Watch a story about them here

So the Tamil Tigers are no more and yet another ethnic conflict comes to a miserable end. How many killed for this? Has it made any difference? It may take some time for that question to be answered. Like many ethnic conflicts, this one seems to have gone on for a long time making one wonder what exactly it was all about.

My parents actually lived in Sri Lanka for a short time just before the civil war broke out. I spent the Xmas holidays on 1980/1 visiting them and enjoying the gorgeous beaches of the south west and the green hinterland. When I heard that civil war had broken out it didn’t really resonate with me. As a 14 year old, the Sinhalese and Tamils I had met just seemed like people. Also growing up with the conflict in Northern Ireland never far from the news, it seemed par for the course.

People, even of the same colour and country, could still engage in war. Both sides of my family have been on the wrong end of the ethnic vacuum cleaner so maybe I was just inured to it.But these days I am very tuned into any mention of ethincity and references to improving the hygiene of ones home country.

Whilst pondering the end of the latest carnage I was floored by the story of a Catholic man who was beaten to death by a group of Rangers football supporters in a small town in Northern Ireland. It was after Rangers had triumphed by winning the Scottish soccer leage competiton that a bunch of Rangers fans, Protestants, decided to pay a visit to the Catholic part of town and basically murder someone. Which they did.

So it continues. It’s a bit 20th century though.

Nowhere is immune from this.

What about that gorgeous Kingdom of Happiness, Bhutan. Apparently a wonderful place to visit and a very progressive society. In fact about 5 years ago I included Bhutan in a paper on E-government. It was quite advanced for a small mountainous country. No mention in the Wikipedia entry of ethnic cleansing.

Yet in the last 15 Years nearly 15-20% of the population has been cleansed and evicted from the country. What the..???

They certainly kept that quiet. 120,000 Bhutanese have been transformed into refugees living in 7 camps in Nepal. Some have found their way here to Christchurch to start a new life.

It feels like an ongoing epidemic……it’s hard to know when it will stop. Our identity is so important to us, yet at the same time it allows the tyranny of the majority an easy way to express any kind of anger or frustration. As Amartya Sen writes in “Identity and Violence“,

“..a major source of potential conflict in the contemporary world is the presumption that people can be uniquely categorized based on religion or culture”.

Indeed but it’s our willingness to succumb to group behaviour and peer pressure that allows atrocities like ethnic cleansing and genocide to happy. How can we move away from the “clash of civilizations” and to an appreciation of the person?

Actually I don’t know if we can. It seems so ingrained in our nature. Of course we can all educate our children and imbue them with values that include compassion, kindness and care.

I wonder how technology will help? I have a feeling that will play a bigger part than we realise. Maybe when all the teenagers around the world are connected through the semantic web……who knows?