Slowly but surely mainstream commentators, economists and policy analysts are all starting to realise that exponential debt is the core of our current economic malaise. This is great news to those of us who have been banging on about this for many years.

But still there is confusion around what to do about it. “Saving” has become the new buzzword, sitting squarely alongside “austerity”, as private individuals are urged to save more and governments are urged to spend less. That sounds like a sensible way forward. But watch the economy tank when that happens. Why?

Simply because when debt is paid down (and no corresponding new loans made) the money supply contracts as the debt is destroyed. The debt never existed as “money” in the sense of notes and coin but as an asset and liability for the bank. The interest is collected and the debt destroyed, leaving the profit for the bank. A monetary system based on debt will always lead to booms and busts as the interest charged overwhelms the ability of the productive sector to pay it. Ironically the system always needs infusions of new debt to stay afloat as the amount of money in the system declines.

Of course, when companies start to lay off workers (their first cost saving option) this creates uncertainty and an unwillingness for new borrowing to take place. This creates a self-reinforcing cycle which in some cases leads to recessions and occasionally to depressions. So what’s the best way out of this?

Austerity? No. Austerity will keep some investors happy but generally this will simply lead to slower growth and higher unemployment. But austerity is also a fact of life. When you have borrowed money and spent it, you know one day you have to pay it back. If you haven’t saved for that day then you will have to forego consumption for repayment. If you are in that position, which many governments are, you have, in fact, over consumed your income and eaten into your future. That’s not a pleasant space to be.

Is there an alternative?

Yes there is. I’d like to propose what i term “Monetary Dialysis”. This process seeks to replace debt money with real money (let’s assume for the moment that fiat money is real). The difference between debt money and real money is two fold: firstly, real money is permanent and once it enters the banking system it remains there; secondly, real money enters the banking system without interest, with no charge for its creation.

This two key differences will lead to new outcomes: a more stable money base and a less inflationary one.

How will this process take place?

The government, instead of issuing new bonds to raise money (primarily from overseas investors), will directly spend the money into the economy. In other words public spending will be funded by new money, not new debt. Immediately there will be a saving in interest costs, with current funding costing 5-6% per annum. The current annual bill (previous to the recent enlarged debt issuance) has been running at close to $4billion a year which is a hefty sum (I am only talking government borrowing here).

I use the term dialysis as a representation of a monetary system that is malfunctioning, not just here but globally. I propose a slow transfusion with the goal to end government borrowing completely by 2017.

Where’s the catch? Ok clearly there needs to be some balancing on the other side of the equation. As well as issuing new money instead of new debt, another part of the monetary dialysis approach is to create stronger limits on the abilities of banks to increase the money supply through the issuance of new debt. This can be done in many ways, using a variety of macro prudential tools, whether it’s increasing capital requirements or other similar actions.

Monetary Dialysis is the first step to cleaning up our monetary system. It will lead to a more stable money supply, lower inflation and clear savings in interest costs. The reduction in public debt will be highly beneficial for the economy and the country as a whole. The cost savings from this clean up will be in the order of $20billion over 6 years.

Now that’s something to really think about.

Capitalism and free markets.

What a great idea. It’s a shame no one has actually tried it out or bothered to let homo rationalus economicus that it’s an urban myth. We operate mainly in a state sponsored system of capital markets underpinned by arcane and often opaque trading rules and regulations.

The provision of capital is key to any functioning economy and has been since the beginning of time. Each empire had its own approach to coinage to support trade and the governing class or head of state. The first pillar of modern capitalism was established in 1694 with the formation of the Bank of England. Thus began the first stirrings of the fractional reserve banking system and the modern financial system.

I’ve previously covered the many bailouts experienced by the banking system and the Bank of England itself and in some ways our current malaise is no different. The central precept of free markets is that they should operate on their own merits - caveat emptor.

I’m not going to discuss that fallacy here but focus on the problems of bail outs. Why should a failing business be rescued by the state? The simple answer to that is when it has implications for the national economy or issues of national security (often regarded as twos sides of the same coin). We have seen the fiasco in the US, the UK and Europe. We have seen the banking system bailed out, private companies bailed out and yet we still hear the mantra of free markets, trade and market liberalisation and privatisation repeated.

Here in NZ we have seen South Canterbury Finance bailed out and most recently AMI. On both occasions the government intervened to provide capital from taxpayers for businesses which had clearly failed. In the case of SCF depositors were guaranteed under a standard deposit guarantee framework but bondholders also benefitted to the tune of $350m. Those bonds should never have been covered under a deposit guarantee scheme. Investors enjoyed a big free lunch here at the expense of the taxpayer. In the case of AMI, the government intervened to support an insurance company who didn’t have enough reserves on hand post the February 22nd quake. The government could easily make a good case for supporting AMI, in terms of providing it with backstop liquidity but in doing so it needed to be very clear that it was suspending any belief in free markets.

The moral hazard is clear but the implications have not been explored. On one hand the government wants to bail out private companies who are clearly responsible for their own position. At the same time they want to promote policies like privatisation because, wait for it, private companies are more efficient than public ones.

It’s very clear that the neo-liberal dream is in tatters but no one seems to want to wake up and smell the reality. Market morality is indeed quite hazardous.

Bill English, the NZ Finance Minister, has predictably gone for the traditional response when considering how to pay for the rebuilding of post-quake Christchurch: he wants to borrow $10bln and add further to the mountain of debt New Zealand already struggles under.

At current government bond yields this is likely (presuming the issue is in longer term bonds) to cost over half a billions dollars a year. That’s right $500-550m a year in cost, just to access the money we need.

Bill English has our recent proposal to use new public money in front of him but so far we have heard nothing back on it. Other than an earthquake levy, which has been ruled out also, there are no other proposals on the table.

I look forward to hearing why the Finance Minister thinks paying $500m a year is a good idea for something we could do ourselves.

Before the earthquake of February 22nd I had been working on an outline for where I saw NZ today and where I believed it could be in 2025. It’s very much a hi level view but it’s a starting point. Though things have changed since the big shake my vision hasn’t. If anything it has simply reinforced my thoughts. Over time I will flesh out the different ideas and hopefully make it more accessible to all. In the meantime feel free to think about where you believe we can be in 2025.

As Yogi Berra said, “if you don’t know where you are going, any road will lead you there”.

The Feb 22nd rumble has delayed my analysis of the WWG report into long term benefit dependency but in between shoveling silt, delivering chemical toilets and getting our chimneys removed, I have managed to have a peek. I only looked at the executive summary paper but there is a fuller report for those who want to look at some of the detail behind the argument.

There has already been some outraged commentary on some of the more sensitive aspects of the report but it’s worth a closer look. Clearly we have a serious problem with the benefit system at the moment: there are 376,000 people on some form of benefit (79,058 on unemployment (UB), 68,056 on sickness (SB), 99,269 on invalid’s (IB) and 99,289 on the domestic purposes (DPB) plus other smaller categories). Having 167,325 people unable to work through ill health or disability is a major issue but that’s really a health problem not an economic one. Having nearly 100,000 sole parents on benefits is a serious social problem reflecting the breakdown in the family as well as unstable and unhealthy relationships. That leaves 79,000 unemployed and actively looking for work. That is a big number at a time when the economy is heading for a double dip recession.

So those are the important numbers but what does the WWG have to say about them? They outline 8 key reform themes amongst 43 recommendations (42 would have suggested a dark sense of humour!)

1) The key theme of the report is the importance of paid work. That’s interesting because I imagine most people would like to have paid work to do. Unfortunately with 79,000 unemployed it suggests there isn’t enough paid work around (certainly not enough suitable jobs). So it’s all very well saying paid work is the way forward but if the jobs are not there then it becomes a platitude. The focus on paid work also ignores the fact that many people do very important unpaid work: this includes child rearing (100,000 sole parents on the DPB), caring for the unwell, volunteering and other unrecorded contributions. This is where the report really misses the target. By only offering up paid work as a contribution to society it misunderstands how society functions, seeing society as a simple economic structure. If we valued unpaid work then that might be the case and actually there is a very sensible way of doing that which I will come to later.

2) Reciprocal obligations: this reinforces the paid work theme by making sure people are taking all reasonable steps to find work even if this means moving about the country (echoes of Norman Tebbit and his infamous and misquoted “on yer bike” remark). 2 comments here: Reciprocity is important. A benefit is a gift from the taxpayer in times of hardship. In return one is expected to do one’s best to find a job or at least re-train in order to find a different job. The problem with treating labour as a highly mobile input is that families are disrupted. Still it’s a fair point to make. With online job search sites now available, people can find suitable jobs all over the country. However, relocating may not be as easy (or cost efficient) as it sounds. This leads into the next theme.

3) Taking a long term view: the WWG recognised the need for further investment into education, training and job finding services. This makes sense. Every time someone becomes unemployed they need a thorough assessment of their abilities and potential opportunities. At that point upskilling and retraining can be offered. From what I have heard the current system is a bit lackluster in this department.

The remaining 5 themes are fairly standard fare: measuring outcomes, focus on Maori (31% on welfare, 41% of DBP recipients), focus on at-risk children (220,000 living in benefit households), cross government approach (bringing in health and education departments as well as the community) and more effective delivery (new outcomes focused agency). All standard stuff.

There has been a bit of an uproar over 2 recommendations:

- One is over the 14 week return to work proposal: this is actually about addressing the issue of having further children whilst on welfare and it is designed to act as a disincentive. This ties in with the expectation to look for work once your youngest child reaches 3 (up to 20 hours a week). It is quite specific to people who already have children and go on to have another one whilst on welfare. I think it’s reasonable to ask people to put off having further children until they are in a stable financial situation. Otherwise we do get into the potential situation of multiple children to extend time on benefit. The WWG notes that the government should monitor this policy closely and apply further financial disincentives if necessary. John Key has already said he’s uncomfortable with this proposal and this demonstrates how difficult this issue is to address.

- The other is the furore over teenage pregnancy and contraception. One of the proposals is to offer free long term contraception to women on welfare as a way of helping to ensure no further pregnancies. This ties in with a post from 2008 which looks at incentives around teenage pregnancy. It’s always preferable to see behaviours change intrinsically but it is likely to require some serious incentives to capture the attention of young people and use that to show that there are alternatives. Whether it’s annual payments into a savings scheme such as Kiwisaver or housing deposit. Incentives do matter and can help bring about lasting change.

Two fundamental changes have been proposed from these 8 key themes:

-  A new single work focused welfare payment called Jobseeker Support (with more focused supplementary benefits above that).

- A new agency called Employment and Support New Zealand (ESNZ) to implement new approach.

Interestingly enough they ruled out a guaranteed minimum income on the basis on large costs and transitional problems (they relied on a Treasury report which I will discuss in an upcoming post) but have tried to move the various benefits to a single payment, the Jobseeker Support. This really is the crux of the problem: how can people be supported whilst they are in between jobs, yet at the same time not penalised or disincentivised not to work at the margin and how can we make sure people are gainfully occupied when there are no jobs available. The UK has had a go at welfare reform as well coming up with a Universal Credit which again tries to simplify the payment process whilst incentivising the work search.

To summarise the report:

- Paid work is where it’s at.

- Labour is mobile and should go wherever the work is with appropriate support.

- Better training, support and rehabilitation is needed to help people into new employment.

- We should discourage women from having further children on welfare, teenage pregnancy and get sole parents in the workforce when their youngest turns 3 (or 14 weeks if you’ve been silly enough to have another one whilst collecting your benefit).

- Reciprocity and obligation: there’s no such thing as a free lunch.

- Invest for the future.

- Reduce beneficiaries by 100,000 by 2021.

- Improve efficiency in structure and delivery of benefits and employment prospects.

All in all these are sensible suggestions in a perfect world so what’s missing? Jobs for a start. As well as poor outcomes from an education system under strain, poor health from a section of society living in poverty and wages which for many have gone nowhere over the last 20 years. Unfortunately the WWG were given a poisoned chalice (governments have become good at outsourcing bad news) since the problems of welfare are deep seated and structural. I think they have made a reasonable fist of it despite the headline hysteria. So what’s my take on it? I’m a big fan of basic income, which comes in many forms, because I believe we have a structural decline in the availability of jobs which is going to get worse as technology strides ahead. However, there is never going to be a shortage of work. That’s the critical difference. Work can be paid or unpaid. By ignoring the value of unpaid work the WWG leaves itself with few options other than the ones they have recommended.

This is why I personally favour a conditional basic income to replace all benefits and superannuation (which I will discuss in more detail in another post). I’m glad the WWG raised the issue of reciprocity and obligation as I think it’s a very positive way to look at welfare. I’m also in favour of more investment into education and training for the workforce (the recommendation for all 16/17 year olds to be in paid work or training is good). Overall there is a need to really look at the future of work in a changing society, the embedded inequality and lack of positive pathways for many. The WWG is a very worthwhile effort at bringing some issues out for debate. It certainly doesn’t have all the answers and it does look at work through a very narrow lens but it’s a discussion we need to have with clear heads. This is just the start.

I was at University when the quake struck, eating my lunch and reading a paper on “Native Rights”. I didn’t hang about and immediately dived under the table as I didn’t like the look of the walls and ceiling lights flailing about like paper decorations. When the first shake had finished I headed outside quickly and sat down whilst the two big after shocks rocked the surrounding buildings. The University seemed reasonably unscathed……nothing like the CBD which is 5 kms to the East.

The damage of the Feb 22nd 6.3 shake is way worse than the Sep 4th 7.1 quake. No doubt this is due to the depth and the proximity of the epicenter. But this post is not about the earthquake, it’s about the economic impact and the re-building to come.

The cost of this disaster is only guessable at the moment. Numbers from $10 to 16bln have been thrown out but it could be anything. There is no doubt that this is a complete rebuild of the city’s infrastructure and central business district. Added to that is the viability of the eastern suburbs. They were affected badly and there will be questions over ground issues when it comes to re-building.

I want to go back to 1936 and the First Labour government which introduced low interest loans as part of a system of public finance to rebuild the country’s post-war economy. Think of it as New Zealand’s New Deal. The Reserve Bank governor can direct this at any time. This is certainly one possibility.

What I would like to see is fresh new money being injected directly into the economy by the government. The Treasury can action this at any time. The New Zealand economy has been struggling for a few years now since the GFC hit and deleveraging started. Business is struggling and cash is constantly tight. This latest quake will have finished off many business hanging by a thread.

I am proposing the Treasury create $5bln of new interest free money and credit it to the Government Earthquake Department for use in the rebuilding of public infrastructure. This is real money (not debt) and it will flow through into the economy thus giving it a boost as well as providing liquidity to the economy.

The money supply will increase by $5bln but I don’t believe there will be any inflationary risk. We are currently in a period of deflation and deleveraging with falling house prices and economic stagnation. NZ needs all the help it can get and there has never been a greater need nor a better time for this proposal.

It’s time for a New Deal. Please pass this on if you can.