Peter Lyon writes New Zealand has endured through more than a decade of zombie economies. Image / 123rf
Peter Lyon writes New Zealand has endured through more than a decade of zombie economies. Image / 123rf
Opinion
COMMENT;
The Reserve Bank is driving down interest rates to record lows to get us to borrow and spend more to pump up the economy. I sometimes feel like an economic pariah but does anyone else find this bizarre given the huge mountain of private debt we are already have?We are being encouraged to take on more debt to "save" the economy. The Emperor has no clothes.
What is happening, both here and abroad, is the death throes of an economic orthodoxy that has dominated global thinking since the 1970s. It's called monetarism, though it's a bastardised version.
Free markets, deregulation, privatisation, globalisation and anti-inflation monetarism were the hall marks of this ideology. The ideology actually collapsed in 2008 but many economies managed to sail on. This was because central banks pumped up their economies' corpses with easy money, ultra-low interest rates and more private debt. We have had more than a decade of zombie economies as a result.
Ultra-low interest rates and easy money drive up the prices of assets such as property and shares. This favours the wealthy and privileged but is a recipe for economic and political polarisation and disintegration.
In New Zealand, our version of zombie economics has been a debt-fuelled asset bubble in real estate and shares. The main driver of our housing market has been huge debt levels rather than migration or income growth or supply issues. There is no actual housing shortage in Whanganui or West Coast or Dunedin despite recent price inflation. It's just the banks mopping up. Real median wages have largely stagnated and there has been little new industrial development. Record migration has pumped up headline GDP figures in recent years but most people are little better off in their real incomes.
Yet, consumer inflation has been minimal. Inflation rates have remained at the lower band of the Reserve Bank's target of 1 to 3 per cent despite ultra-low interest rates.
This is hardly surprising. The prices of tradeables has largely stagnated. Tradeables are items that are traded internationally such as electronics, consumer durables and commodities such as milk powder, coffee and oil. New Zealand is a very open economy. The world economy has witnessed an unprecedented increase in output as countries such as India and China and Brazil mobilise their resources to make more stuff to sell on world markets. So overall consumer price inflation has been negligible. But stuff that is not traded internationally such as housing, rates and electricity has skyrocketed in price. Headline inflation appears non existent but people are paying more for certain essentials.
Meanwhile, the ability of workers in New Zealand to demand a larger share of the economic pie has been deliberately dismantled in recent decades. Teachers have just won a pay rise after a lengthy bitter battle, but their real income in the past few decades has gone nowhere. Unions have little power due to global competition and a huge decline in membership. It's every man and woman for themselves in this new brave world. That tends to favour those whose interests are more concentrated.
The lack of growth in real median incomes has been mitigated for some people by housing inflation and access to easy credit. They have felt better off because their house has gone up in value. People have taken on more debt which has been easily available to try to live the lifestyles they feel they are entitled to. But they are working harder than ever just to stay in the same place.
This is why the "R" words causes such panic. A recession could topple the ugly debt mountain if unemployment spiked. Widespread debt defaults would brutally expose the reality that our "rock star" economy was a debt-fuelled illusion.
I am not a fan of Karl Marx but he was right in one thing. Modern economics represents a battle between capital and labour over who gets the larger part of the economic pie. Capital has won hands down in recent decades.
Those who are wealthy are getting much wealthier, on paper. Ultra-low interest rates and easy money drive up the prices of assets such as property and shares. This favours the wealthy and privileged. But it's a recipe for economic and political polarisation and disintegration. Other countries are already experiencing this reality. Our monetarist approach to managing the economy is severely flawed. We need a serious reboot.
• Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics texts
