The Upcoming Budget Can’t To The Job

The upcoming budget will do more harm than good. With unemployment rising and work hours falling, the Government has to open the economic shutters, not close them.

Modern debt-based economies are wholly debt driven. Without vast increases in debt from year to year the economy must go into recession, or worse.

The year ending March, for example, saw the economy dip sharply. The accumulated current account worsened by over NZ$16 billion, while Domestic Credit increased by more than NZ$19 billion. Collectively we borrowed more than NZ$35 billion extra last year and still went backwards[1].

As things stand, with average deposit interest rates heading down below 4% we need “only” NZ$18 billion or so to cover the unearned income payments on deposits arising from our total debt of around NZ$445 billion dollars. Somebody has to borrow that extra debt into circulation before we even begin to consider inflation or growth. 2% inflation adds another NZ$ 4 billion or so into the pot and 3% growth another $6 billion or so.

Where is NZ$28 billion going to come from if the banks won’t lend to us, the government won’t borrow, and consumers and businesses are wary of taking on more debt? We can’t keep depending on borrowing foreigners’ savings as we have been doing for more than 20 years. We’ve already borrowed NZ$155 billion from them, making New Zealand the second most indebted country per capita in the western word, after Iceland.

As has happened so often in the past, we are being trapped in the self-fulfilling prophecy of a failed and thoroughly discredited debt financial system. Risk-averse banks are furiously salting away reserves to cover the losses that will be caused indirectly by their own unwillingness to lend. Government is battening down the hatches to avoid fiscal deficits caused by reduced business activity and waning household incomes it could easily stimulate by expansionary spending. The public at large is frightened by the prospect of job losses, falling real wages and unemployment.

The choice is between bleeding to death on the altar of economic orthodoxy or trying something a little different. By different, I mean using two bits of common sense in tandem.

The first bit of common sense is for the government step outside the present interest-bearing debt system. The government should inject some new debt-free electronic currency into the financial system and use it to help pay for productive public spending in health, education and infrastructure. It has existing sovereign power to do this as of right. The electronic currency or E-notes is exactly like ordinary currency except it exists only in bank accounts.

Each NZ$1 billion of E-notes will add at least NZ$3.5 billion to economic activity. In the first year the government should inject up to NZ$6 billion of them into the financial system to kickstart the economy at no cost to itself whatever. The amounts in following years would need to be adjusted downwards as the economy quickly recovers.

The second bit of common sense would be to recapitalise Kiwibank in tranches of up to NZ$0.5 billion for each tranche. That would enable Kiwibank to lend up to NZ$5.5 billion extra into the economy for each tranche. Other banks could participate in the process as long as they agree to sell new shares to the Government in return for the new capital they receive. In fact it would be better that way because Kiwibank might choke on a NZ$0.5 billion recapitalisation on its own until it can build up the human resources it would need to safely lend such a large amount of new debt into circulation.

Three tranches of bank recapitalisation (NZ$16.5 billion in new lending) together with NZ$6 billion in E-notes (about NZ$ 21 billion in new economic activity) will together provide the financial resources the country needs to recover from the downturn and return to full growth.

There is no cost to the government in this plan. In fact the government gains billions of dollars each year from the net taxation it receives on the added economic activity. That tax gain will be enough to offset nearly all the budget deficit!

It just isn’t good enough for Ministers or officials to stand on ceremony over these proposals by suggesting the government can’t intervene in the banking system in times of crisis. The government has a first duty to the people of New Zealand, not the banks. And, in this instance, the proposed intervention helps everyone, including the banks.

Notes:
[1] If you find this hard to believe you can check the stats on the Reserve Bank rbnz.govt.nz website

Lowell Manning
11th May, 2009

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