Gareth Morgan, Director of Gareth Morgan Investments
The Economic Summit. held in 1985 decided NZ had to reform its policy delinquency. No more use of monetary policy as the instrument of stop/start fine tuning; no more neglect,. of inflation as a disease that undermined NZ’s long term economic growth; no more use of government interventions that steered private sector investment in particular directions irrespective of what market forces dictated; and no more unfettered expansion of government expenditure, without a cold look at what cost that expenditure imparts upon its taxpayer underwriters.
The summit’s advice came about because of three decades of sliding growth performance ending in a foreign debt crisis4 The advice I tendered to private sector clients immediately was, de-gear balance sheets, and internationalise, this domestic economy will no longer be the garden of earnings that it’s been.
Policy implementation under the new Labour government got off to an horrendous start. Interest rates were raised as the ‘fully-funded’ approach t financing the government deficit was introduced. But the exchange rate remained fixed. The result? ? Foreign capital poured in to reap the high rates, the fixed exchange rate obliging the RB to issue NZ dollars to foreigners. The money supply rocketed, and with it was born speculative crapulence. At fault for that policy misdemeanour? The RB gave the advice to delay the float, yet invoke fully funding.
Even after the float, it quickly became clear that the private sector interpreted financial deregulation as licence for unfettered speculation. On publicly tendering advice to Roger Douglas that mortgage rates at the time should be raised to 40% if that was necessary to curb the credit-led explosion, his public retort was that my view was too extreme, nothing was wrong.
And what of business leaders? How many de-geared their balance sheets, and internationalised their businesses? Several simply expanded their balance sheets, with no attention paid to long term business viability of acquisitions, content to use huge dollops of debt to achieve the short term delusion of growth. Business acumen or incompetence? Today, those not lying charred in the ashes of speculative folly have, at their latest summit, concluded policy changes they sponsored were all wrong and we should now forget about inflation and expand domestic demand two outcomes which would facilitate their own escape from management failure. Or would it ?
An expansion of domestic demand at this time would blow out the BoP even further. The devaluation that arose, while temporarily boosting the nominal incomes for besieged commodity exporters, would thwart Ni’s growth, raising the cost of investment goods, threatening higher inflation, exacerbating the external debt, and underpinning an even higher interest rate premium. Why can’t government just cut expenditure by $3 bn at least and positively catapult capital markets into cutting NZ’s risk premium ? There’s no future for Ni in pushing domestic demand as the provocateur of growth. Calls from the Calligulas of Leverage for the dismissal of particular government servants suggest last week’s summit was predominantly policy flatulence- both pathetic and tragic for NZ.