Can central banks fix economic problems?

Brent King

Wednesday 2nd November 2011

We have seen the Minister of Finance, Bill English, announced a record government deficit of $18.4 billion. And yet no-one really cared. The markets took this in their stride and continued as if there was nothing wrong.

Yes, about $9 billion related to the Christchurch earthquake. However $9 billion did not. New Zealand is in serious trouble. Our government is grossly overspending, its wage and salary bills are exploding, we have more rules and regulations and yet no progress on either the financial or social fronts.

New Zealand is not much different than most Western economies. The gross overspending, the inevitable deficits and the incurring of debt are crippling the Western world. They are surviving solely on the fact that somebody wishes to lend money.

The majority of people do not understand what a Central Bank is set up to do, i.e. what it does and its objectives are. The Reserve Bank of New Zealand is like most Central Banks; their roles relate to money supply and maintenance of an orderly banking environment. They do not create wealth.

They do not aid social responsibil- ity. They do not care about whether the economy is efficient or whether the government is spending or whether investing or spending is in the right sectors. They do care about inflation and having banks that can meet their obligations.

Central Banks are looking at money supply only, not about whether the economy is moving in the right direction for the country’s current and future prosperity.

The fiasco we are seeing with Greece and other European countries where the focus is simply on a rescue package is short sighted and must fail. It is very easy to lend somebody more money because they have gotten into difficulty, but problems relate to helping the party restructure their income and expenditure.

Unless Greece changes its approach and chooses to run surpluses it must get into trouble again. New Zealand is in exactly the same position. Although we may move towards a surplus because National chooses to sell assets, this has not changed the structure of New Zealand or the government. You have sold half of your silver (partial privatisation) but you continue to waste money on stupid and irrelevant matters.

Unless New Zealand demands an outcome that makes New Zealand better each year than the year before we will continue to be reliant on money supply increasing to make our houses more valuable so that we can take bigger mortgages, have our overseas trips and flat screen TVs.

Yes, democracy is for the people. However, real leadership is sometimes leading the people against their will.

On a brighter note, with the financial distress and the mayhem as outlined above occurring, some very interesting opportunities are being presented. If a person does want to get superior returns there are opportunities to do so and there are some very interesting opportunities occurring for those who have a good broker and an understanding of how to access risk and return. The dumbest thing now is to stop investing. The smartest thing now is to invest smart.

Leaving your money in the bank may appear to be attractive. However, losing the three to six per cent returns you can gain may be costly in the medium term.

Investors must not freeze – they must maintain and keep on moving forward. There have been some shares that have risen 20 – 30 per cent.

Investors need to ensure they are thinking about making a return on their investment and not simply going into hibernation.

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