One hundred years ago farmers would load sheep carcasses onto the, then, latest technology; refrigerator ships. These would belch smoke as they steamed to the other side of the world. It meant exporters earned foreign currency. This kick-started New Zealand on the path to, fifty years later, being one of the world’s richest countries.Bill Bennett
This quote contains a couple of the most common of mistakes made about economics and finances.
The first mistake is the belief that the country became wealthy by exporting. It didn’t, it had the wealth already here in the resources that we exported for money. Sure, it certainly helped at the time by allowing the country to import manufactured goods that we didn’t produce here but ongoing development of the economy and the countries vast resources would have reduced the need for imports over time.
The second mistake, and probably the biggest, is the belief that we needed foreign currency. We didn’t and still don’t. If the new New Zealand government of 1853 had declared the NZ Dollar with a reasonable exchange rate to the British Pound the country would probably have been better off.
A country’s currency isn’t backed by gold or silver or any other commodity. It’s backed by the country’s economy and this fact gives the government of any country the right to print money. In the context of the 1853 NZ Government with the government printing money and then using that money to buy the necessary manufactured goods which then would have stimulated demand for NZ’s goods thus pushing the development of the economy both in goods for export and as means to replace imports.
Yes, there’s a danger that the government will print too much money but that danger is actually far more prevalent in the private banking system. In fact, such danger is so bad the British government had to step in and curtail the private banks from creating ‘Bank Money’ back in the 19th century as it was destroying the economy. Also true of Germany in the 1920s:
The great German hyperinflation of 1922-23 is one of the most widely cited examples by those who insist that private bankers, not governments, should control the money system. What is practically unknown about that sordid affair is that it occurred under control of a privately owned and controlled central bank.Germany’s 1923 Hyperinflation: A “Private” Affair
The same danger exists today and seems to be getting worse if the developed world’s rising house prices are anything to go by.
Many of us were told that house prices are so high because there are too many people and not enough houses. While this is true, house prices have also been pushed up by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis.Positive Money (UK)
That’s hundreds of billions of pounds created that doesn’t have any true value in the UK. The same will apply in the US, EU and, of course, NZ all proportional to the size of the housing market of course.
Simply put, the rising house prices of the world are proof of a failed financial system.
Another mistake made by Bill in his article is this:
There’s nothing wrong with physical exports, that’s been what we’ve done for as long as anyone can remember.Bill Bennett
Yes, there is, quite a lot in fact. We simply don’t have the resources available for continuous exportation of them. Exporting our physical resources is exporting our wealth. If we continue down the path of exporting our physical resources there will be no ‘rivers of gold’ as our entire society would have collapsed from the lack of resources needed to sustain it. There’s evidence showing that such was part of the collapse of the Ancient Roman Empire.
There is a reason, after all, as to why economics is called ‘the study of scarce resources’. There are, unfortunately, numerous aspects of scarcity that our modern economics has failed to study and then there’s the political side where, even if it has been studied, the results are ignored because it doesn’t suit the political climate. Global Climate Change is, of course, a major example of this wilful blindness.
In a New Zealand context we have two such examples:
The first is steel production and exportation. There are limits to how much iron sand we have, how much coking coal and how much electricity can be spared to produce it. The coking coal and iron sands have absolute physical limits and sooner or later we will run out of them with the proviso that the more we export the sooner we run out. Electricity is significantly different in that, if we use renewable production, the production of electricity will last forever but within any limited timespan there will only be a limited amount to distribute.
The second is farming in that our natural resources are already beyond limits thus requiring the use of artificial fertiliser but the use of artificial fertiliser itself has limits. The first obvious limit is the capability of the environment to deal with it with the ever decreasing quality of our waterways showing that we’re already well beyond that limit. As artificial fertiliser is made from hydrocarbons pulled from out of the ground it is limited to absolute constraints (there’s only so much of it) and time constraints (there’s only so much that can be pulled out of the ground at a time).
Our actual available resources are limited and yet we keep treating them as unlimited which can only lead to the collapse of the economy.
Bill did get one thing right though:
Yet tomorrow’s rivers of gold are going to come from exporting photons. We need to start thinking of games exports in the same way we once thought of meat or dairy exports.Bill Bennett
Our future economy needs to be based upon our ideas.