KEY POINTS:
This week, I confirmed something I've suspected for a long time. A pointy-head who is a professor at the prestigious Johns Hopkins University in Boston and was an economic adviser to former President Ronald Reagan said this week our economy was "in a death spiral". Even the phrase itself should make even the most apathetic sit up sharp.
Most New Zealanders' brains tend to glaze over when boffins start pontificating on the economy.
Economists are a secular priesthood, where they speak their own gibberish, and we hope they know what they're talking about. In recent times, however, the economic soothsayers are all over the paddock, with different and often competing interpretations, and certainly not offering any solutions. The result is most of us are more baffled and confused than ever.
But when I read this week that Warren Buffet - one of the richest men in the world - made more than NZ$150 million just by speculating on our dollar from 2003 to 2006, I know something very, very bad is going on with our economy. This year alone, our exchange rate has soared to 27 per cent. The mind boggles how much extra money he and other foreign speculators have been skimming off us in the past six months.
While our commentators have been obsessing about the Reserve Bank's hikes on our interest rates, they've been missing the main problem. We are in a no-win position over interest rates. Alan Bollard, the Governor of the Reserve Bank, is - by law - instructed to keep inflation down. He is supposedly independent of all political pressure. Stupidly, he only has the tool of raising interest rates in an attempt to slow down the economy, and therefore - in theory, at least - reduce inflation.
But despite his increasing our interest rates four times this year - indications are they will go up next week as well as next month - the housing market continues to boom. Commonsense suggests that people take out loans to buy homes before the interests go up even more. What are they supposed to do? Pay the landlord more rent?
Unfortunately for New Zealand, when the interest rates are increased, speculators from all around the world come flooding in to buy up NZ dollars. This sends our exchange rate through the roof. These foreign investors then make a fortune. Meanwhile, the exchange rate makes it impossible for our exporters to make any money sending their goods overseas.
Just think for a minute what the impact of a 27 per cent increase in the exchange rate in the past six months would mean if you were running an export business. Is it any wonder NZ manufacturers are closing operations and setting up offshore. This, of course, leads to the loss of jobs.
The other impact of the increase in our dollar is that all of the imports become significantly cheaper. Consumers would be mugs not to cash in on these bargains. Of course they take out loans or use credit cards.
Then this spending fuels inflation. Bollard, once more, lifts the interest rates. Therein lays the problem. As our US boffin describes it: "New Zealand is like a dog chasing its tail."
The cheapest home for sale in Auckland this week was a "bottom bargain price" - $335,000. When home prices are booming, then paying interest rates of nearly 10 per cent is still a bargain.
One-third of New Zealanders buy additional homes as investments. As they're able to write off the interest against their income tax, why wouldn't they continue to do it? The Government doesn't charge them any tax on the enormous capital gains they make when they sell these properties. Business logic demands that for anyone who owns their own home, they should borrow whatever they can and buy as many other properties as they can. A couple of per cent interest difference won't matter.
Of course this leads to the bottom third of New Zealanders who do not have their own homes being priced out of realising their dream of owning their own home. Just to service a loan on the cheapest house in Auckland requires anybody earning the average wage to pay their entire income just to pay their loan interest. How possible is that? Not a chance.
The Government is creating a permanent property-less underclass that will be paying much of their wage in rent to those others who are fortunate enough to own property. Human nature dictates these people might as well give up any long-term dream, use what little money they have to buy cheap imported goods, pay the exorbitant rents that will be demanded, and live for the present.
So while the financial elite in the world toast the great NZ experiment where we took off economic controls and let the free market reign, ordinary people are getting to pay the bill.
Someone did their sums on their KiwiSaver this week and realised that if they put their maximum investment into it, they would have, in 40 years, enough to put a deposit on the cheapest house sold in Auckland this week - providing, of course, that the value of the house doesn't go up in that time. And we know that's not going to happen.
Who knows? She might have enough to put a deposit on a garage so one day her grandchildren may be able to own the garage they'll have to live in. Yes, my friends, the great free market is at work. The rich will get richer, the poor poorer, jobs will go offshore, and international speculators will continue to bleed us dry.
