Friday, April 8, 2011

Thinking the Unthinkable

I am suspending the series on the History of Money for today as I felt compelled to respond to an article in our main daily here in New Zealand about our debt situation.

Here's the paragraph that got me all-a-flutter:

Thinking the unthinkable

Now for something a little more controversial.

- One solution for getting rid of debts you can't afford to pay is printing money.

This a last resort, but it is not unprecedented and it's something that the leader of the western world (America) is doing right now.

The Reserve Bank could buy these bonds currently being issued by the government and essentially inflate the debt away. That punishes both local savers and foreign creditors (who hold our debt in New Zealand dollars) but it does fix the problem of indebtedness. It would also immediately cause a slump in our currency.

This would have been unthinkable a few years ago.

But when it's good enough for America, maybe it could be good enough for us too.

I realize that Bernard Hickey is posing ideas to prompt discussion, but the QE, or money printing, approach is the worst of a bad bunch.

For one thing it simply 'kicks the can down the road'. It puts the debt problem off for another day and another generation. The debt isn't dealt with, just paid off with phoney money of no worth. Interest rates and costs will rise.

And don't get me started on the possibility of high inflation perhaps bordering on hyperinflation.

New Zealand can devalue our currency by allowing the Reserve Bank to buy our own debt, but the consequences of this could be enormous. Debasing a currency kills the middle-class and retirees.

Those who have saved will be punished. Our older folk who need funds to survive in their dotage will find they have nothing. Their hard-earned savings stolen through inflation. Just research what happened to savings in pre-world war two Germany in their hyperinflation.

And when has printing money ever worked? Just ask Japan over the last 20 years, or the US since 2008. No great changes to the positive in those economies.

And we are hardly the US who can print money at will and then threaten to park an aircraft carrier off the coast of any country that complains about their loans to them being devalued.

Debt isn't all bad, especially when it gets invested into creating greater productivity. But most of our new debt has gone into the housing boom. Not much productivity there. A much smaller percentage since 2008 has gone into business lending where wealth production occurs.

New Zealand needs to decide how to restructure the debt. There are a few choices:
  • Default on the debt
  • Restructure the debt
  • Use Quantitative easing (print or inflate the money supply)
  • Reduce the debt by paying it down through austerity measures.

None of these choices are easy.

I don't believe we can continue to borrow money to pay for welfare programmes. But how will we support our needy and vulnerable people? Any ideas? Do we go back to a more caring society based around small communities?

There comes a day when we will not be able to pay the interest on our debt. Much of the developed world is getting to this limit. New Zealand is now borrowing about $400 million a week. Perhaps our limit is here.

There is no easy way out for a high debt nation. We have borrowed today to pay for stuff that we couldn't afford. We bought forward our spending and now we have to pay for it.

The Great Correction continues...
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Articles of interest:

How the foreign profit and interest drain has made us poorer
See article here
NZ Herald

Gold: 40 years of turmoil
A helpful review of the history of gold here
The Telegraph
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Silver hits $40...

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