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.

I’ve finally finished wading through the paperweight (as is the norm) aka the Savings Working Group report. Having read the initial commentary, I wasn’t that excited about the prospect but often in these reports there are useful nuggets of information. The main noise is around saving more and adjusting savings incentives especially to promote Kiwisaver.

What is not clear though is to what extent we have an actual savings problem. Our gross saving is at the low end of the OECD with Portugal and Greece below us along with two nations that might surprise: The US and the UK (page 121). There is also difficulty in analysing the differences between household and business saving. NZ is a country of small businesses and often business and household financials are closely interlinked. There is no definite conclusion around this issue and the report asks for further research into this topic, especially around data collection.

The macro level is really where the problem can be seen. When looking at the growth in national wealth, it’s clear to see that housing revaluations are the key driver (page 127) of growth since 1999. In fact “property revaluations explain nearly all changes in household net worth since 2001 (page 130). This is another way of demonstrating that we haven’t actually created any productive wealth: we’ve simply revalued our housing base and used that to fund increased consumption. That consumption has been funded by debt and that is why we have a serious debt problem.

So can we save our way out of this problem? Looking at the data on household incomes one would have to say “no chance”. Market incomes have fallen (yes fallen) for the bottom half of the population between 1988 and 2007 (page 140). That is simply astounding. This at a time when house prices have risen 490%. This is the cause of the deepening inequality between the owners of property and the renters. Even with benefits added in income for the first four deciles has remained largely the same (page 141).

Poor choices? Or simply no income with which to save. I think we must face the fact that half of our population is existing on meagre income. They cannot save and are likely to be in debt simply by virtue of not having enough cash to afford purchases or expenses outside of the simple basics of living. Those who have managed to get on the property ladder have prospered primarily because their asset has risen substantially in value. That is where their  savings lie. It should be noted though that, for many, this increased wealth is purely on paper.

At this point it might be worth looking across to data from Australia (page 128. Aussies actually have more of their wealth in residential property than Kiwis do (50% vs 46%). Investment in shares in much the same (8% vs 9%). The big difference is in long term assets. Aussies have 19% in Pensions and Superannuation whereas Kiwis have 2%. To balance that out Kiwis have 22% in business and farm assets against Aussies holding just 9%. So for Kiwis businesses and farms are their pensions. This is not an exact comparison but it’s clear that there is not much to separate the two countries other than Aussies invest in public companies and Kiwis keep it private. It also shows that Australia may have the same debt problem we do though they have benefitted more from the commodities bubble than NZ.

The oft quoted statement (from Ministers, the RB and other officials) that Kiwis should save more is somewhat optimistic. Save more from what exactly?

So what can we do? Well we can look at the other side of the savings coin and that is our expenditure. As a country we have essentially borrowed our GDP for the last 20 years. This is reflected in our current account position which has left us with a Net Foreign Liability (NFL) of 85% of GDP. Poor investment and low labour productivity (not sure where the NZBR gets its numbers from) has left is with nearly 40 years of negative current account balances (pages 20-24). The simple explanation is that we have consumed more than we have sold (plus all that accumulated and compounding interest). This consistent deficit should have seen NZ with a consistently weak currency (to allow the balance of payments to correct) but this has not been the case. NZ’s high real interest rates have been attracting overseas investment looking for a high yielding home (page 26). NZ is seen as a safe place to invest and, in an era of low global rates, has seen major inward flows which have not just funded the current account deficit but also the major revaluation in house prices.

The accumulated current account deficit has pushed interest rates thus forcing up the currency . This in turn has made imports even cheaper fueling the spending boom and embedding the circularity of higher prices in the economy (page 39). The bottom line here is that our currency is too high. This has been noted for some time but successive governments have chosen to ignore the problem, hoping that regular comments will help keep a lid on its appreciation. A 2010 IMF study estimated “that stabilising NFL would require the real effective exchange rate to depreciate by 20%”….that’s to just keep NFl where it is now. To reduce “NFL to 75% of GDP over 15 years would require the real effective exchange rate to depreciate by 25%” (page 36).

That would put the NZ$ at between $0.55-0.60. Ouch!

That is the real story to come out of this report. To summarise:

- We don’t save much because half the population has had no increase in income for 20 years.

- The other half have increased wealth due to large revaluations in house prices.

- The top 2 deciles have seen increases in wages and this is where most of the real saving is coming from (if any).

- Debt funded consumption has seen interest rates rise thereby sucking in more investment flows and boosting the currency.

- We have borrowed to live and really have no spare cash to save.

- The best form of saving is paying down debt, both private and public.

- The only way to improve our position is to export more and import less.

- The primary way to export more and import less is to engineer a significant and lasting depreciation in the currency.

- The second option is to develop and invest further in export based industries.

Adjusting tax incentives and boosting Kiwisaver are not going to help us out of this malaise. Only strong and decisive action can help us from here. So what would I recommend? That’s too much for this post but at a high level some of the following (most of which I have written about previously).

- Lower the exchange rate by direct intervention.

- Cut interest rates as well as bringing down the cost of mortgages which are still very high.

- Restrict bank credit by raising asset requirements.

- Build a self-sustaining energy sector.

- Introduce a basic income to replace welfare and superannuation.

- Liquidate the overseas portion of the Cullen Fund (now whilst markets are at 30 month highs).

- Invest more in the productive export sector.

- Oh and let’s have a land tax whilst we’re at it (this was ruled out by the government in the terms of reference!).

Next week: The Welfare Working Group reports…..can’t wait!

Yesterday Julia Gillard became the first foreign leader to give a speech in Parliament. It was full of mateship and the usual joshing that is a theme for Australian-New Zealand relations. Beneath the jovial tone lay the theme of integration. This has been around for a long time, probably since the CER was first implemented back in 1983. It’s been somewhat on the backburner over the last 12 months as Australia has gone through a political shift but now the same theme is back on the table.

Is complete economic union likely? I addressed this back in September 2009 when it was last on the table. What has changed since then?

There has been a major shift in global political alignments. As the shift of economic power has moved from West to East, so has the political spotlight. Back in 2008 I noted cross border acquisitions from the East and that these signaled a major shift to a post-imperial world. That shift has continued apace with China rising to the fore, now the second largest economy in the world. For the ANZAC brothers that has major implications.

Being connected to the ASEAN has helped both Australia and New Zealand define its geo-political position in a post-Empire world, specifically post European Community integration. Asia is quite clearly the major focus in terms of trade and this has seen some interesting reaction from the old allies. This year we had a visit from William Hague, the British Foreign Secretary, along with his Defence colleague, Liam Fox. It was the first visit in almost 20 years and indicated that the UK was taking this shift East a little bit more seriously. Suddenly old friends were very much worth getting to know again. Previous to this we had a semi-royal visit from Hilary Clinton, the US Secretary of State, down under to sign the Wellington Declaration which put NZ back in the very, very good friends corner. And today we see the Treasury heads of the UK and Australia in town to meet with their NZ counterpart. This is of note as it is the first time they have met together.

So what does this all mean? Simply it’s a jostling for position and a reaffirming of old ties in  a very new world. This puts Australia and New Zealand in a very strong strategic position. We are friends of the old and the new world. We are well located geographically…out of the way but close enough. For the ANZAC buddies that poses some interesting questions. Stronger together, weaker alone or carry on as is?

We can see that the CER is being re-negotiated to allow of higher levels of non-reviewed investment which could mean a lift for corporate activity as well as a loss of company control. And this is really the crux of the matter. Do we want to control our own destiny? Lessons from Europe are all too stark in this regard. Sinking economies have no room to lower their currencies and so swing in the wind, completely reliant on bailouts.

Ultimately the people will decide on this, though its clear that further integration around common borders, regulations and practices is likely to continue. At what point does having separate currencies become a pain? Well ask anyone trying to transfer money between the two countries. You would imagine you could shift cash at minor spreads but actually you pay through the nose. Travelex is one the worst players in this market. Even market spreads are quite wide. So there is definitely a cost to doing business which might add up to 1-2% of overall activity.

A nation’s currency is ultimately a reflection of its sovereignty. The ability to issue your own coin is one the the most recognised symbols of nationhood and has often been as an economic weapon in the colonisation process. If you lose that ability then you lose control. It’s as simple as that. The way to overcome that is to just recognise that you are part of something bigger (in this case Australasia) and take the good with the bad. Personally I think it’s a tough decision to make. History tells me that having control over your own affairs is a good thing. But perhaps the mateship bond will swing views the other way. Perhaps it’s already happened. I’ll leave the final word to Peter Costello, the former Australian Treasurer, at the second Australia New Zealand Leadership Forum in April 2005 (“Crisis”, Bollard, 2010, 26):

“You guys in New Zealand have to get real. If you want to be part of a single economic market with us you can forget having your own banking system. Remember, you sold your banks to us: you don’t own your financial system any more. Leave the regulation to us”.

Strewth!!

“

On a weekend where The Green Party laid out its vision for NZ, I came across an article in the “Weekend” magazine section of the Press about junk food, schools and kids eating poorly. The article, by Paul Christensen (I’ll try and get a link to it), reports on concerns about child obesity and how some schools are taking action by growing and cooking their own food.

As Russel Norman noted in his address to the Green Party,

“There are 20,000 New Zealand children going to school each day without food, or shoes or raincoats”

This is a major issue facing NZ. Poor health and nutrition impacts hugely on the ability to learn and on general outcomes in life. As Jamie Oliver has shown with his Food Revolution, starting early in schools can change behaviour before it becomes embedded and beyond repair. The Sustainable Kids Programme has been a real winner so far but we need more of this. Sadly the National Party over turned a previous policy on health eating in schools. It’s these types of programmes that are being slowly squeezed in the name of cutting spending. This is the classic mistake many governments make when trying to cut costs….they don’t realise that this ends up costing us all more in the long run.

We should be investing hugely in our children. In an employment constrained world, in an outsourced world, in a world of highly competitive manufacturing, we need our people to be as well as possible. They are our future. If we are going to develop a hi-tech, productive and efficient economic system then we need smart kids with good habits and a good understanding of how systems work. Food and nutrition is a perfect example of where this kind of learning can come from. If you ever seen the faces on children who have grown their own food and then cooked and eaten it then you will know what I am talking about.

We are in severe need of new jobs. Well here is a start: get every school a food and nutrition specialist, with a garden alongside. Make it a core part of the curriculum. It’s as important as P.E. (if not more important according to research). I would love to see all schools with a canteen, cooking and supplying a healthy lunchtime meal. For some children this may be the most important meal of the day. Now imagine how many jobs that could generate (with 2000 primary and secondary schools in the country).

The main argument against this approach has been of interfering in what should be a parental responsibility and also taking away to choice to eat crap, unhealthy food. Well my response to that would be to argue that schools have the advantage of scale: they can teach many kids at once. Scale is the pathway to efficiency. The most efficient way to get healthy eating into our society is through our schools and our children. They children will then take that back home and slowly change will take place.

It’s this type of vision that we need to see. Hopefully the Green Party will be the ones to bring it to the Parliamentary table.

Today John Key revealed the policy what we have all been waiting for: privatisation or, in his words, partial asset sales. Let me be clear that I am not against privatisation as a whole but certainly I am very concerned about the sale of key and core infrastructure assets. I also noticed how John trotted out the “TINA” message: there is no alternative otherwise S+P will downgrade us. Expect to hear this being repeated as some kind of mantra…..otherwise saying we are dependent on the opinion of the same guys who rated dodgy Collateralized Debt Obligations (CDOs) as AAA.

There are some key human requirements for any society. We are lucky to be blessed by all of them: plentiful water, energy generation and food production. Any decent society with these assets should be able to provide them to all people at the lowest possible cost. Why? Because it can.

We are already well into a fight over NZ’s water assets and consumers are paying through the nose for basic food items especially dairy in which we are global leaders. Energy is also costing us more and more each year as the dysfunctional electricity market continues to fail.

Contact Energy has already been sold off to foreign investors with Australian energy company Origin owning 51%. Expect more pain in the pricing policy we have witnessed since this company was first floated. I have never understood the need for energy generation (water is even more inexplicable) to be a competitive process between private companies. Deregulation has not delivered cheaper prices and yet more privatisation is on the cards.

The deregulation of the 80s made was driven by a desire for greater efficiency and more dynamic management as well as the demand from financiers for new investment prospects. But change could have been brought about in different ways such as simply instituting new management, guidelines etc. It would be very possible to run a state owned company focused on providing electricity, in all forms, with the sole focus of the customer.

So instead of selling off more energy assets we should be thinking about changing the model. I favour looking at some form of  quota based allocation which comes at the cheapest possible price (a break-even number) with market pricing on top of that. These quotas could be traded (as in DTQs 0r Domestic Tradable Quotas) as part of a generalised carbon trading scheme. But the important issue is that energy is a basic human need and in New Zealand this can and should be provided at the cheapest possible cost. I do not believe, and have seen no evidence, that the current system delivers this.

We should also address the silly argument about “mum and dad” investors. Please no more of this patronising label. Lots of people are investors, not just these mythical and no doubt unsophisticated “mums and dads”. But let’s point out the very obvious hole in this argument. We already own these companies, yes us taxpayers, mums, dads and bubs…we own it already so why do we need to re-buy into it? plenty of money for the investment banks involved in the float (they have been pushing this for ages). More importantly there will be losers: low income people who simply could not afford to buy into the share bonanza….it’s just another process for transferring wealth from low to high income earners. This will look great for some but ultimately we all lose in the end and inequality is further increased.

Privatisation is only going to make things worse. It’s time to put people before profit.

Sorry John, there is an alternative.

Surely the ultimate humiliation for New Zealand would not be losing the Bledisloe Cup nor even seeing the Wallabies win the Rugby World Cup in 2011 at Eden Park but the bone jarring crunch of monetary union with Australia.

Recently smoke signals have been wafting from the Beehive as John Key and Kevin Rudd white flagged the issue in recent talks. When politicians say it’s a good idea but unlikely you know that it’s on the table. In fact this is not a new story. It comes up whenever there has been a proper meltdown and New Zealand looks a bit lonely and downbeat.

It’s been raised by some local economic commentators and all the usual pros and cons have been mentioned. Don Brash laid these all out nicely in a speech back in May 2000 and it’s hard to see past his conclusion that it is primarily a political decision, given that the economic pay off is unclear.

It may be a political decision then but it may not be a comfortable one. As Bernard Hickey writes today “we may not have a choice if we continue to borrow heavily”. The “shotgun wedding” wouldn’t be the most favourable outcome but NZ is not well placed at the moment. To coin a phrase you can’t be a little bit pregnant.

And, as Brian Gaynor writes, according to a recent OECD study, New Zealand is perilously close to Iceland in a ranking of countries with exposure to “overseas debt……personal debt and financial leverage”.The numbers are eye watering and the piper will be most surely paid at some point in time.

But, for now, the Australian banks, which make up most of our banking system, have underwritten us by sending new capital across the ditch. We also had to follow Australia’s deposit guarantee scheme with no choice in the matter. To all extents and purposes we are heavily dependent on them. So as Bernard notes we may find ourselves at the altar of currency union by default and not by political will. And it may happen sooner than we think.

Is there an alternative? Yes. A fully sovereign domestic money supply. More on that another time.