Waving money wand is risky business

19:44, Oct 10 2012
Flight of the Conchords
BUSINESS TIME: Flight of the Conchords Jemaine Clement and Bret McKenzie were wary of schemes.

Flight of the Conchords fans may remember a line from the BBC radio series that preceded their television show, in which hapless manager Murray describes improbable business arrangements with a businessman from the Ivory Coast.

"It sounds too good to be true," says Jemaine.

"Well, that's why I went for it!" Murray replies.

To judge by the deluge of applause this week for Green Party co-leader Russel Norman's call for quantitative easing (QE) as an answer to New Zealand's stuttering economic recovery, it seems there are plenty of Murrays out there.

QE is an emergency measure, an experiment by the central banks of some of the world's largest and most troubled economies.

It's risky and it's not something to do lightly in a globally irrelevant economy that is still growing and still has positive interests such as New Zealand's.


Nor is QE a panacea. As The Economist notes this week, there's not even a guarantee that QE definitively creates a lower exchange rate.

In the end, the relative strength of economies remains the underlying driver - that is, the United States dollar will be weak for as long as the US economy remains weak.

Nothing we do here is going to change that.

Nevertheless, ideas like QE are the kind of silver-bullet easy answer that appeals here, with jobs threatened, salaries stalled and the grind of life since the global financial crisis just a bit too endless.

Yet if it was really such an easy answer, two things would happen. First, every country everywhere would print money until the cows came home, but they're not.

Second, all the money-printing would be stimulating the elusive global economic recovery, but it's not.

While unconventional monetary policy actions have definitely achieved some stabilisation in distressed global financial systems, these measures aren't enough in themselves to pull moribund economies out of their mire.

That's the basic conclusion of the International Monetary Fund, which warned of diminishing returns from such efforts, while cutting its global growth forecasts.

The unfortunate truth is that relying too heavily on central banks waving the money-printing wand and too little on the unpopular policy actions the rich nations can't avoid to restore their competitiveness is not a winning recipe.

It's fashionable at present to dismiss such an orthodox view as the outdated ramblings of a neoliberal Luddite. However, it's more subtle than that.

For 30 years in this country and longer in others, a prevailing view that markets know better than governments is being deeply and rightly questioned.

As British commentator Anatole Kaletsky, in his 2010 book Capitalism 4.0, puts it: "The most distinctive feature of capitalism's next era will be a recognition that governments and markets can both be wrong and that sometimes their errors can be near fatal."

That opens up opportunities for "leadership, creativity, and experimentation in both politics and business".

That's what we're seeing in the suggestions from Labour and the Greens about changes to many policy settings.

In the area of monetary policy, they look adventurous, but in areas such as capital gains taxes and rebates for research and development, their plans look standard.

Moreover, with inflation out for the count for the time being, it's becoming respectable to try to make monetary policy do more than simply keep prices stable. The mistake, however, is to think that political leaders can abdicate responsibility for sustainable economic recovery to boffins yanking levers on the money supply.

All the same, there is one orthodox monetary policy action that could, but not necessarily would, make a difference, and it is as orthodox as they come - that is, to cut the official cash rate to match the cut last week by the Reserve Bank of Australia.

The New Zealand dollar may be a storm-tossed minnow in the global financial markets, but the relationship between our dollar and that of our largest export market is comparatively hardwired. Our immediate economic fortunes depend heavily on Australia's.

The Australian economy was our safety valve during the global financial crisis, partly because the kiwi exchange rate remained highly competitive for exports to Australia.

Now, with the crisis grinding on and Australia coming off the boil, the kiwi has been creeping up against the Australian dollar at a time when we know its weakness will mean weakness here.

Preserving competitiveness with Australia, at the very least, appears achievable and justified, using an answer that's as conventional as they come.

The Dominion Post