The answers are simple the solutions are complex.

We are broke and getting broker for some very simple reasons …

1. Our exchange rate is too high
2. Our exchange rate is open to manipulation (it is unstable).
3. The worse our economy gets the higher our currency rises when we need it to fall – this is the complete opposite of what needs to happen
4. We play by the rules of free trade and no one else does
5. Foreign owned banks use inflation and speculation to fill the country full of debt and capture our productive surpluses.
6. Banks can print money without any effective control by the state
7. We spend more than we earn
8. We are squandering the talents of our young while burdening them with debt
9. Our retirement savings are inflating the share-market
10. Anything of value is sold to foreign investors
11. Our employers have to meet the social costs of trading in New Zealand while their competitors don’t (an effective subsidy)
12. Labour is taxed while energy capital and land aren’t
13. We treat basic infrastructure as an “investment” rather than as a basic function of production – roads aren’t there to make money they exist to allow business to function - same with power telephone and a whole raft of other things.
14. And we too often allow the core institutions of community and commerce to act with impunity with regard to the law and to moral behaviour.

It is not foreign forces or some compelling logic causing these things to happen to us.

The last reason is that we have just suffered thirty years of ideological leadership.  

It is our leadership that has made us poor as we have wished this on ourselves.  The mess that is the Euro is the best illustration of the problem of exchange rates not reflecting the relative earning potential of separate national economies.  We have the same issue with Australia the US and China,  as Greece has with Germany - our principal trading partenrs are cheating on the free trade deal   and we are the losers.  Our dollars is over-valued to an extent of about 30% in comparisons to them.  This could be resolved overnight - but it would take courage.

It is this ideological base that is the first thing that needs changed. 

Once that has happened then fixing this country is easy - we are rich in resources, we are well educated, we should be energy self sufficient.  We should be the luckiest country in the world but our leadership prevents this from happening.

The sad state of the New Zealand Economy

The effects of our economic belief system on our balance of payments

The global economy relies on a set of rules to ensure fair and free trade.  The “Free Trade” nations rely on the “level playing field” that is they rely on all partners acting honestly and openly and according to the same set of rules.  This however is not the practice.  Only some countries abide by the rules.  The effect of the cheats versus the honest players is the same as in cards.  Cheats prosper.  One of the basic concepts of free trades is the floating exchange rate.  The floating exchange rate should in theory result in each country’s exchange rate moving to a point where its imports and exports balance because the value of its currency will move up when it’s export flows improve and down when its imports become excessive.  The result is that a country with a strong exchange rate will import more and a weak one will produce more internally.  The fundamental flaw in the world of trade is that not all parties do this.  If any one country can artificially fix its’ currency at an artificially low level then it will have a trading advantage that is equivalent to a tariff on imports and a subsidy on exports.  Conversely with a country like New Zealand where we have a severely over valued currency we are effectively subsidising imports and placing a tariff on exports.  Our indebtedness is a clear testimony to that.

The Central Intelligence Agency publishes an annual set of Country Reports and in 2008 its summary of nation’s current account balance had the greatest surpluses in the hands of the countries that are oil rich and have nationalised their oil resources, Saudi Arabia, Russia Norway and Kuwait, or that have currency controls and are centrally planned economies China, Japan Singapore and arguably Switzerland.  The beneficiary nations of the European Union also rank up there as the EU set permanent currency distortions with undervalued currencies for the northern European countries and over valued for the southern nations.

Rank	Country		Current account balance
1	China	Protectionist/undervalued	$ 363,300,000,000
2	Japan	Protectionist/undervalued	$ 195,900,000,000
3	Germany	Protectionist/undervalued	$ 185,100,000,000
4	Saudi Arabia	Oil/Nationalised	$ 88,890,000,000
5	Russia	Oil/Nationalised	$ 74,000,000,000
6	Switzerland	Protectionist/undervalued	$ 67,890,000,000
7	Netherlands	Protectionist/undervalued	$ 59,280,000,000
8	Norway	Protectionist/undervalued	$ 55,820,000,000
9	Kuwait	Oil/Nationalised	$ 51,490,000,000
10	Singapore	Central planned	$ 41,390,000,000

At the bottom of the list we have the global trade basket cases.  What is interesting to note is that most of the worst cases are governed by free market ideologies.  India has the same cheap labour pool advantages as China.  Australia has an equivalent natural resource wealth as Saudi Arabia.  

New Zealand is on a per capita basis one of the most well endowed countries on the planet.  But we are at the losing end of the global trade war.  Our indebtedness means that we are becoming ever poorer as the cheats at the game of global free trade take our money from us and use it to buy our assets.  This makes us poorer again.  Our indebtedness is a black hole and our fatal path into its’ depths is inexorable – under the current ideology.  

 

150	New Zealand	Resource rich free market	$ -9,973,000,000
151	Ireland	Free market/overvalued	$ -12,600,000,000
152	Poland	Free market/overvalued	$ -18,130,000,000
153	India		$ -18,530,000,000
154	Portugal		$ -18,530,000,000
155	South Africa	Resource rich free market	$ -20,060,000,000
156	Romania		$ -22,600,000,000
157	France	Free market/overvalued	$ -35,940,000,000
158	Turkey	Free market/overvalued	$ -36,270,000,000
159	Greece	Free market/overvalued	$ -36,400,000,000
160	Australia	Resource rich free market	$ -50,960,000,000
161	Italy	Free market/overvalued	$ -57,940,000,000
162	United Kingdom	Free market/overvalued	$ -111,000,000,000
163	Spain	Free market/overvalued	$ -126,300,000,000
164	United States	Resource rich free market	$ -747,100,000,000

Our free market ideology endows us with a victim mentality.   We can’t remove ourselves from the abuse and we applaud our abusers.

China, the worst offender doesn’t just cheat on the floating currency, it cheats on copyright, it cheats on employment and environment law and it subsidises energy. It also uses a wide range of non-tariff barriers to trade to protect its own domestic economy.  It also trades in our domestic market without having to meet all the costs of production that the domestic producer must face.  The more of our domestic production that imports displace, the fewer domestic producers remain to cover the social overhead of our domestic economy with the result that the domestic producer is either crushed by the overheads or shifts production to a place where these overheads don’t exist. 

China has seen the flaws in our ideology and is exploiting them.  China will end up owning us using our own money to buy us.  This is as inevitable as gravity.  The global trade imbalance is structural and it will persist and grow for as long as we its victims allow it to.  As resource owners we have the power, as the oil owning states that have nationalised their resources have already learned.   If we want to get out of this situation we need to learn from our abusers and stop listening to our fellow abused who can be identified on the CIA list along side us.  Several of these have already fallen into the economic black hole.  We are only being prevented from joining them because we are resource exporters and we have major capital inflows as our resources are removed from our ownership.  This is a temporary respite.  

We can escape from this situation but it will take a very different approach to trade and commerce and to finance to achieve it.