We Can't Print Our Way To Prosperity

Last night, the ACT Party voted against New Zealand First’s Reserve Bank of New Zealand (Amending Primary Function of Bank) Amendment Bill.

We did so because it was a snake oil bill.

Producing wealth is hard; it takes investment, it takes ingenuity, it takes work, it takes patience.  

There are no short cuts.

That’s why ACT opposed New Zealand First’s bill - because it promised to replace hard work with printing money.

The bill basically said that if the Reserve Bank printed money faster from time to time, we would be richer.  Of course the bill didn’t spell that out, but that’s what it meant.  

But at the end of the day the Reserve Bank has one job and that is to set the money supply.    

It can run the printing presses fast, or it can run them slow.

If it runs them fast there will be more New Zealand Dollars.  If there are more New Zealand dollars, people will pay less for them, and the nominal exchange rate will go down.

Some people think that would make it easier to export – but it would not.

The nominal exchange rate might go down, but foreigners will need more of our devalued Kiwi dollars to afford our exports because prices throughout the New Zealand economy would be higher.

In the long run exporters will be no better off, but there will be a large disturbance as the economy adapts to inflation.  Up goes the price of petrol, up goes the price of cars, up goes the price of electronics, up goes the price of food.

When the Reserve bank Bill was introduced this bill several weeks ago the ACT Party thought it was poor economic policy.  But then Green Co-Leader Russell Norman decided to show us real economic lunacy with his explicit call for the printing of money.

What New Zealand First, the Greens and Labour have failed to realise is that there is no shortcut to economic prosperity.

Our Reserve Bank Act is based on the simple idea that a New Zealand Dollar today should be worth a New Zealand Dollar tomorrow.   The ACT Party believes in that simple principle.

Many of our members run their own businesses and our own Party Leader has been in business for 45 years.  He is well connected in the business community and he knows that exporters would like the real exchange rate to go down.  That would allow our export sector to be more competitive.|

The ACT Party shares this goal, but we believe we need to go down a different path from the one the Opposition parties are peddling.

If we look back over our country’s history, this country has had two great Ministers of Finance - one was the founder of ACT, the Hon Sir Roger Douglas, the other was the National Party’s Ruth Richardson.  These two Ministers of Finance set our economy on track for growth and exports.

The Reserve Bank Act is part of Sir Roger’s legacy.  Under the current Act we have exported more than we imported every single year from 1988-2004, bar one.  

So what went wrong from 2005? 

Here’s a clue…. Winston Peters.

Helen Clark needed Winston’s support to form a Government, and from that moment spending went through the roof.

Government spending went up.

The Official Cash Rate hit an all time high.

Mortgage rates went up.  And the dollar hit 80 cents.

That’s what the last Red, Green, Peters Government gave us.

Government spending is generally wasteful, wasteful spending drives inflation and inflation drives a higher Official Cash Rate.  A higher Official Cash Rate drives demand for Kiwi dollars and raises the exchange rate.

But worse than government spending is government borrowing.

Overseas borrowing by the Government requires foreign lenders to buy New Zealand currency (because that’s the currency our government borrows in) --raising our exchange rate directly.  An export friendly dollar will come with lower government spending.  It will not come from printing money.

Printing money might lower the nominal exchange rate but it will not lower the real exchange rate that businesses depend on.

We think it is ironic that the parties who support defiling the currency are the same parties who would spend more and make it worse for exporters.  

The ACT Party is the party of a stable currency and rational economics.

And that’s why, last night, we opposed this bill.