Steve Baron: Inefficient Economic Policy

A subject that few people have an interest or understanding in, is economics—even though government economic policy can have an immense effect on our everyday lives, in more ways than we realise. But it is something each of us needs to give more thought to and become more informed upon rather than just trusting elected representatives and those with expertise in these areas. Does it ever seem strange to you that when we seem to be doing well as a country, the Reserve Bank jumps in and increases interest rates? This increases the cost of mortgages and business loans which become more difficult to manage which seems a punishment for doing well as a nation and is a strange conundrum.

New Zealand relies heavily on our exporting, as do most countries, to produce overseas income. Farming industries are a good example of this. Therefore, the policy of interest rate controls, through the Reserve Bank, has a major bearing on how we do as a nation. This economic tool is used to control inflation but also has a powerful effect on our export businesses. If the Reserve Bank increases interest rates to kerb inflation, this pushes up the exchange rate, because overseas investors buy New Zealand dollars to get higher returns than they might get in their own country. This in turn makes our exports more expensive to overseas buyers so they purchase less, and exporters make less money. Higher interest rates also makes doing business more expensive and means New Zealanders have less money to invest in productive businesses. The opposite also applies. If the Reserve bank lowers interest rates it runs the risk of higher inflation which is also bad for the country. The use of interest rate controls would therefore seem an inefficient tool because the better we do, the more we get punished. Inflation is indeed an insidious cost on society and needs to be kept under control. However, this economic policy is no longer sufficient in a competitive global economy, especially when the exchange rate is crucial to the New Zealand economy. Interest rate controls are also prone to time-lag problems. It is often a year or more before the desired effect happens, and even then it is hit and miss.

There are other economic tools that are more effective and efficient. Fiscal policy (taxation and government spending) is more effective at controlling inflation and not as prone to time-lags. Another aspect that needs to be considered, because of its damaging effects, is the expansion of the money supply. This happens because our money supply is expanded through bank loans and all money being created comes in as a debt (interest payments). So therefore there is always a shortage of money, because there is never enough money to pay back the borrowed money and the interest charges they have accrued. As one former US President, Thomas Jefferson said, “the issuing power of money should be taken from the banks, and restored to the people to whom it belongs”. Another was Abraham Lincoln who said, “the government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers”. Some economists have in the past suggested this could be done by what is called 100% banking. Banks would be forced to hold a cash reserve of 100% matching every sight and savings deposit, thereby stemming the creation of money. It would be up to an independent National Credit Authority to decide how much new money needed to be put into circulation, or taken out, as and when it was needed, free of debt. How this debt free money is distributed or used is another discussion. Let me make myself quite clear here, I am not talking about nationalising banks, only nationalising our monetary system.

This new approach would make it easier for authorities to control inflation or deflation and keep interest rates and government debt lower—all without raising interest rates, which adversely affect exports. This would have a stabilising effect on our exchange rate and discourage speculators from trying to manipulate our currency. A prospering economy and sharemaket will also provide investors with better returns.