Coronavirus: It doesn't matter how we got here, the question is how do we dig ourselves out
Thursday, 26 March 2020
OPINION: New Zealand is living through an economic collapse comparable to the Great Depression.
We will need new ideas on how to rebuild our economy once we emerge from our self-imposed Matrix.
But first, let's survey how bad this is going to be.
I am an insolvency practitioner and although my experience is anecdotal as opposed to a scientific gauge of how private firms are coping; the extent of wealth destruction is incomprehensible.
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* Reserve Bank to buy $30b of government bonds to ease monetary conditions
* Reserve Bank governor Adrian Orr says NZ in good space to face 'horrible situation'**
Firms that have been built up over decades, in one case three generations, are facing extinction.
Our annual Gross Domestic Product is slightly less than $300 billion. This week Parliament granted the Finance Minister the ability to spend an additional $52 billion.
This is more than half of what the Government was budgeted to spend in fiscal 2020.
Investors have become reluctant to lend to the New Zealand Government, causing interest rates to jump.
To help out the Reserve Bank has committed to printing $30b to purchase this debt.
Adrian Orr doesn't like to call it printing money because in theory the state will owe the $30b to the Reserve Bank. But no-one expects it will ever be repaid.
It one sense this is useful. A fall in private borrowing and lending has the effect of reducing the available cash in the economy.
During the Great Depression central banks reduced the amount of cash, for reasons that made sense at the time but it triggered a slew of bank failures.
This won't happen today, as the Reserve Bank will print whatever money our trading banks need to remain open, but it has the effect of thrashing our currency.
This may manifest itself in a spike in inflation, a surge in interest rates, or in some other malign effect, but you cannot print $30b and expect there will not be some accountability.
Add to this a collapse in tax revenue. The Crown receives $14b in company tax, which we can expect to half this year and remain depressed as tax losses accrue.
Both PAYE and GST receipts are certain to plunge, resulting in a fall in gross revenue from a projected $94b to as low as $70b.
Sovereign debt is surging as our GDP is falling and the cost of borrowing is on the rise.
It doesn't matter how we got here, there have been enough failures to keep a Truth and Recrimination Commission busy for decades. The question is how do we dig ourselves out?
Most readers will appreciate that I do not believe in the benign power of government, but let's put my ideological puritanism aside for two hundred brief words.
The state has been broken by two massive financial crises in a dozen years. It was in trouble before this calamity, which is why it's reduced even now to issuing IOUs to itself.
If you believe in government, and here I mean the institution rather than the incumbents, it is time to accept we need to rebuild it.
It is time for us, collectively, to stop looking to Wellington as a source of wealth, as a means by which one person can live at the expense of another, as a tool to impose your agenda onto your neighbours.
We all, from Air New Zealand shareholders to the Ihumātao protesters, need to accept that if we want the state to be able to be there for its citizens in a crisis, the citizens need to replenish the state during times of plenty.
We have recklessly run up a massive fiscal debt and used monetary policy as a means of maintaining house prices and artificially boosting our economy.
Commentators and politicians have pandered to our baser instincts in return for votes and slots on the tele.
The state is nothing more than what we put into it and if we keep drawing from her well it eventually falls dry.
Leadership isn't printing money to keep the electorate happy and making promises that you know your successors cannot keep. It is telling people what they do not want to hear but need to understand.
It is time for such leadership.