Are You Lucky?

If you had been born on a farm in Africa, your economic situation
would not be good:  Possibly no hospital, no education, and a subsistence
way of living.

These guys may well have the last laugh though. Such a system is
quite robust.  As long as things like droughts and local
war lords do not cause problems, you will survive.

This is in contrast to a western style of living which depends
on employment, and economic health etc to keep up a reasonable
standard of living.

Which, at the time of writing is by no means rock solid. There seems
to be a lot of worry by most at the moment, because most of us
are dependent on our job continuing, so that we can pay the
mortgage, put food on the table and so on.

So, how can you possibly be thought of as lucky?

You are only lucky because you were born in a technologically advanced society.
As opposed to being born in a poor part of rural Africa.
The effect of technology seems to be entirely forgotten when
talking about the economy.

For instance, I once worked in a firm that had a large warehouse.
Apparently years ago they needed around 100 men to work all day in it
stacking bags of product. Now, there are 5 robots palletising all
the goods and 5 men riding on forklifts loading trucks.

The point is, as a society, we now, do not need 95 men doing menial work
anymore, so is there a mechanism for them to be paid?

The answer is, yes, and why not? The firm in question is overseas owned so
you can argue that the profits from their operations end up being
sent overseas, which is true.  They probably pay taxes on this.

They may minimize their company taxes, but there is one tax they cannot
avoid, and that is Goods and Services Tax though, which in New Zealand is 15%. 

So the Government gets richer, or should we say, more capable of handing
out money to people who may need it.

Most people baulk at the idea of getting a handout from the Government.
The argument above is surely sound enough to say that they can, and
that they should.

These are worrying times for pensioners in New Zealand, because of
a thing called term deposit interest rates.  These are options
offered by the banks for you to deposit reasonably large amounts, ie
larger than $5,000 with them, for a set period of time, usually months
or years. Most pensioners have these as they are regarded as a
relatively safe form of investment.

Three years ago, term deposit rates were around 3.6%, which although
not that high, were better than the ones available in Europe, which I
think were around 0%.  All my working life (I am retired now), I thought
that it would be a good idea to save money and put it in a term deposit,
as the Superannuation paid by the government was barely enough to
live on. 

This idea is now looking a bit rubbish as term deposit rates are now
about 1.4% for a year.

Conventional economic wisdom seems to be that the Reserve Bank should
cut it's rates, which has the effect of lowering the term deposit rates.
The writing is on the wall that this is going to happen.

Speaking as one about to get squashed under this economic truck, I do
question this wisdom.  After all, does is make sense to stop all these
old people buying cups of coffee and buying false teeth, just because?

I would like to conclude by a quotation from Dr Don Brash, who gave
a talk on this way back in 30 March 2001, but still relevant today:

"But in some respects, central banks are a little like the judiciary,
which most societies have also decided to make independent of
day-to-day political influence in the interests of achieving the
goals established by those societies in the best possible way.

While both the judiciary and central banks can make a very useful
contribution to the societies in which they operate, over the longer
term central banks can't make economies grow much more rapidly,
or materially reduce unemployment, or eliminate the business cycle,
or deal with the problems of particular industries or sectors -
any more than the members of the judiciary can make us all virtuous."

Why Money?

The answer to the question I posed in my last post came relatively
easily, but I had a realization that economics is a much more
complicated subject than you might think, so my simple approaches
could well be flawed, so opposing views are welcome.

The Exchange Rate:

Just printing money does not work for a small country like New Zealand because
you have to consider that most of our output is exported.

For instance you could think of us exporting 500 bales of wool for one Honda car. 
Maybe the Japanese like carpets sometimes?

Even  if we gave everyone say, $10,000 each, the populace would rip on
out and buy themselves the TVs and cars and so on. The problem with this is that this
money is not backed up by some farmer magically producing way more bales of wool
than he has been doing.

In New Zealand at this the moment it is not "printed money", but "borrowed money",
which might make it all OK, except interest has to be paid sometime.

A Simple Economy:

So why do we have this thing called money?

Consider a very small economy for simplicity.

1. We have Dan, who farms wheat and mills it, producing bags of flour.
2. We have Fred, who bakes bread.  Fred needs Dan's flour, and Dan needs Fred's bread.
3. In this situation they could each barter with each other, so no need for money.

The complication comes if we include a third person, Veronica, who makes candles.
She could trade candles for bread, but would have no use for the flour.

Invention of money! Problem solved.

The Invention of Money:

Dan, Fred and Veronica could just get together and issue enough money to keep
their little economy turning over. They could decide that $1000 each should do the trick.
If a loaf of bread is say $1 and a bag of flour is $1 and a candle is $1, you can see that
that Veronica might say to herself,

"Yay, lets have a long holiday.....hmmm what is my stock of candles....hmmmm ok 2!"

One trade later, she is out of candles and does she care? No. The trouble is Dan and
Fred will turn up at her door next week and want to buy some more candles,
and they will be understandably grumpy when she tells them she is out of stock.

So, even on a very simple basis, society breaks down.

An answer to this problem might be to not make the initial handout very big, just
keep it small enough to encourage people to keep on working.
For a society to function it needs all it's plumbers, dentists and so on to
keep on working.

How Money Might Work

The Question:

Why would you need to know all this stuff?  The answer could be that as a voter, you might be a better voter if you had knowledge of how an economy works.  

When the Covid-19 thing came along, the first thing the government did was announce that a lot of 

money would be given to various people and companies to help them get through the lock down. A question asked by a reporter was:

"Where is all this money coming from?" 

 To which the answer was:

"It will be borrowed."  

My question, which somebody may be able to answer is: why borrow? why not just print some?

To approach even some form of an answer from my side, we need to understand how the Reserve Bank works. In the USA, the equivalent of our Reserve Bank would be the Federal Reserve. The following is for New Zealand, but it is probably the similar for other countries.

The reasons why we have a Reserve Bank:

1. To print money to replace worn out money that is in circulation, which has no economic effect.

2. To make loans to the trading banks.  In NZ these include the likes of  Auckland Savings Bank (ASB), Australia and NZ Bank and the Bank of NZ.

The Reserve Bank never makes a profit from it's activities.

How it Lends money to trading banks: 

1. The Governor of the Reserve Bank gets out of bed one day and says:

"Let's offer 100 Million Dollars to the Auckland Savings Bank (ASB), at an interest rate of 6%, for 1 year."

Of course, he is not saying print all this money, because nowadays it is all done electronically.

2. At the Auckland Savings Bank, they accept the offer and duly lend it out at various rates say 7% for mortgages, or higher for credit cards. 

After a year passes, they repay the Reserve Bank back a tidy sum of $106 million dollars, as agreed.

If we suppose the bank made $10 million out of it's lending, then their profit would be $4 million.

The point to think about here is that the net new money in the economy after all this is around $4 million, and most of it will be profit for the bank.  Which, in NZ, are owned mostly by Australian Banks, so this is sent offshore somehow to Australia, effectively removing some of this money, but not all, from the NZ economy.

This example of course assumes everyone paid the bank back in one

year, which is not likely, but for simplicity, we can say they do.

How does this benefit the economy?  

Suppose one of the people lent to was a market gardener who grew only carrots.

He borrows the money and buys machinery, which will mechanize his production, needing less

workers and resulting in a larger profit for himself.  

Now he can sell more carrots, maybe even at a cheaper price, so in effect all of NZ gets "richer".

Of course, not everyone grows carrots, some will be investing in gold rings or caviar.

Let's Print Money and Give it to Ourselves!

This raises the interesting point that, if printing money is so easy, why not print a 

whole bunch and give everyone lots?

Because finance is now digital, money only exists as 0's and 1's in a computer somewhere, so you 

would not even need to print any paper money.

Let's say we gave everyone a decent chunk of money, say $10,0000,000 each.  Thinking about the effects of this, what would you expect?  Take a plumber: he would just sit at home and drink beer, and watch Netflix. No plumbing repairs equals chaos. Society would soon cease to function.

The Universal Basic Income, which has been talked about for some time now could have a similar effect, but apparently, some people like working, so if they were paid a lot more as well it might keep plumbers on the job.

Of course, in our current reality, this has not happened.  We have borrowed lots, and one day it will have to be paid back to someone, with interest.  Not that I am saying they were wrong to borrow the money, I just cannot see why we could not have printed it for ourselves.