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More money = more problems

Fri, 05 Nov 2010

The provinces step up

The results of this year’s Deloitte Fast 50 prove that while Auckland is crucial to New Zealand’s economic growth the rest of the country is not doing too badly either.

In last week’s NBR print edition I wrote about this year’s Fast 50 but one aspect I didn’t cover was where the companies were located.

Auckland supplied 13 of the Fast 50 companies (26%) but Christchurch, which has only about 30% of Auckland’s population, was narrowly behind with an impressive 12 businesses on the list.

Despite its legion of grey suit-wearing bureaucrats Wellington still produces its fair share of entrepreneurs, with 10 of this year’s Fast 50 based in the nation’s capital city.

Hamilton was also well represented with four Fast 50 companies based in the ‘Tron while Dunedin had three companies.

Provincial pride

As well as having a healthy spread of companies across the major cities, the Fast 50 also features plenty of start-ups from small provincial towns across the country.

Nelson, Blenheim, Mt Maunganui, Oamaru, Pukekohe, Queenstown, Rakaia and even tiny Te Kauwhata are all hosts to one of the 50 fastest growing businesses in New Zealand.

Having even one of these highly successful businesses can be a huge boon to a small town because they create new jobs and benefit the existing businesses in the town.

These ventures often start out in classic Kiwi fashion, straight out of the shed, and within a few years they become booming businesses with revenue in the millions.

Instead of funnelling most new immigrants into Auckland the government should think about encouraging them to move into these other thriving cities and regional centres as well.

Taskforce ideas rejected (again)

Once again the National-led government has proven that it’s not prepared to put its policies where its mouth is when it comes to catching up to Australia economically.

There’s no point setting an “aspirational” goal to become an Olympic athlete, commissioning a report that tells you what training you need to do to achieve it, and then ignoring any recommendations that involve actually getting off the couch.

But this is pretty much what the government has done in saying that it would like to match Australia’s income per person by 2025 but it’s just all too much of a hassle.

The latest report by the 2025 Taskforce, chaired by former Reserve Bank governor and National Party leader Don Brash, warned that 400,000 Kiwis will cross the ditch in the next 15 years unless changes are made to arrest New Zealand’s economic decline.

It contained recommendations such as selling state-owned companies, reducing the size of government and bringing in more foreign investment.

Unfortunately, this policy prescription is pretty much the opposite of what various New Zealand governments have done for the last 15 years.

Predictable reaction

The response to the report, from both the government and the opposition, was as predictable as the report’s recommendations.

Prime Minister John Key rejected many of the suggestions such as raising the age of eligibility for New Zealand Superannuation and reducing the minimum wage or re-introducing youth rates to reduce unemployment.

For its coalition partner Act nothing really needs to be said because the 2025 report reads like an Act Party manifesto.

Labour’s finance spokesman David Cunliffe called the 2025 report “ideological claptrap.”

This from a man whose party wants to ban New Zealand farmers from selling their properties to foreigners. Pot, meet kettle.

The Maori Party didn’t seem to make much reaction to the report but catching up with Australia economically should be a priority for this party because many young and talented Maori are heading across the Tasman for a brighter future.

Is it QE2 or the Titanic?

The US Federal Reserve’s $US600 billion “quantitative easing” program announced this week is the latest in a long line of stupid policies that will make the world’s economy worse.

The policy, nicknamed QE2 because this is the second round of it since the global financial crisis, basically means the Fed will buy up assets with newly created money.

In other words, it’s a more sophisticated way for Fed chairman ‘Helicopter Ben’ Bernanke to crank up the printing presses, as he tries to force interest rates lower (the Fed has already set its interest rate at close to zero).

Anyone familiar with Austrian Business Cycle Theory will understand just how damaging the creation of new money to drive down interest rates is for the economy.

According to the theory, when interest rates are artificially pushed below their free market level it creates damaging economic distortions.

This is a result of the misleading price signals they send, which make interest-rate sensitive economic industries (such as housing development) appear more profitable, causing capital to be “malinvested” in loss-making projects.

In New Zealand this has meant a string of property developers facing bankruptcy, leaving behind little more than empty holes in the ground.

Worldwide harm

Because of their unique understanding of how creating money out of thin air damages the economy, Austrian economists were able to predict the global financial crisis not one or two years before it hit but all the way back in 2000-2001.

This was when former Fed chairman Alan Greenspan used what came to be known as the “Greenspan put”, lowering the Fed’s interest rate to pork the stock market after the dotcom bubble burst and 9/11 threatened to push the economy into recession.

His actions hurt not only the American economy but also the economies of many other countries around the world, including New Zealand, due to the loose monetary conditions being “exported.”

The insanely low rates provided fuel for the carry trade, when people borrow cheaply in one country and park the money in another country with higher interest rates (such as New Zealand).

Between 2005 and 2007 New Zealand’s Reserve Bank tried helplessly to slow down the overheating property market by hiking interest rates but banks undercut it by borrowing cheap money offshore.

The Fed’s new “put” won’t bring about a real economic recovery but it will cause economic distortions and it will demonstrate yet again that central planning of the money supply does not and cannot work.

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More money = more problems