SANE Views

Vol.2 No.6, 21 February 2002

Plans for Monetary Reform: New Zealand & South Africa

SANE ideas are reflected in many new initiatives in many countries. Through the 'What Matters Programme' (http://www.whatmatters.nu/contacts.html), long term contributor to SANE, Boudewijn Wegerif, has sent us Lowell Manning's submissions to an Independent Review of the Operation of Monetary Policy conducted in 2000 by the New Zealand Treasury Department. Even though New Zealand's socio-economic realities are very different from those of South Africa, there is a remarkable coincidence between the economic problems faced by the two countries, and indeed by most countries other than the most developed ones.

The 'What Matters Programme' is an initiative by Boudewijn Wegerif, to spread information about what is happening in the world today, and how things could be.

Minister Trevor Manuel has just presented the budget in parliament. He did a competent job. But what he presented is still a long way from SANE ideas such as those of the 'Six Pillars of New Economics' (see SANE Views #1, 2001).

The six 'primary instruments of monetary policy' set out in the submission involve:

A universal, basic income, as a national dividend payable to every citizen, regardless of means and income

A debt and interest-free, public service money supply linked to fundamental reforms of the banking system and the encouragement of local exchange currencies

Tax reform, including a domestic transactions tax, by which tax collection will become automatic, almost costless, and strictly neutral

A commitment to building up a strong network of local exchange currencies, to quickly enable everyone who wishes to take part in worthwhile economic activity to do so

The adoption of measures of economic and cultural wealth that are appropriate to the drive for sustainable living standards - unlike the Gross Domestic Product and Consumer Price Indexes

A commitment to zero balance current accounts through a judicially applied foreign exchange transactions surcharge.
The 'Six-Policies Plan' is presented as a complete social package. Here is Lowell Manning's explanation of how the policies together offer the prospect of a well-structured economy:

"Each of the six policies is a powerful stand-alone policy, but the sum of the six is vastly more powerful than the parts. For example, policy 1 is hard to introduce without policies 2 and 3. While universal income is now being very widely discussed around the world, I believe my proposal is the only one so far that provides seamless integration with existing 'social welfare', and the ability to fund it properly without significant tax increases."

For a summary of the Six-Policies Plan (1,700 words) or the Plan in detail (16,400 Words), please E-mail Lowell Manning direct - [email protected] or [email protected].

Some ideas put forward by Lowell Manning are quoted below:

"The present monetary policy is based on fallacy. I am not suggesting any malice on the part of past governments, the Reserve Bank, or their advisors, but I believe the country cannot progress while its monetary policy is operated on the basis of denial.

In New Zealand, as elsewhere, nearly all money is created as interest-bearing debt. Taken as a whole, the interest charges on that money can only be funded through the creation of further debt. The interest passes to the beneficiaries of the banking system, that is, depositors, shareholders, employees and contractors. A portion also goes to the government as taxation. In this process real wealth is transferred from the borrowers to the beneficiaries.

The money supply therefore has to increase exponentially to accommodate the interest payments unless total productivity increases at the interest rate, or unless all the wealth accumulating to the beneficiaries is redistributed to the borrowers. In practice there is no evidence to support such productivity increases or wealth redistribution. This means the debt system is inherently inflationary."

"For many years now, monetary policy has been specifically directed to avoiding rather than addressing the [following three] fundamental truths:

The monetary system is inherently inflationary by an amount equal to the interest charges across the whole of the debt-created money supply less increases in productivity, (probably around 5% over the past year or two, but in double digits in other years when interest rates were much higher)

The interest charges represent a continual drift of wealth to those that already have real wealth from those that don't, that is, to the rich from the poor. The total drift is of the same order as inherent inflation rate.

The use of high interest rates to "kill" inflation is the absolute, diametric opposite of any coherent anti-inflation policy. High interest rates increase real inflation by an amount equal to the interest rate rise minus any further productivity increases that can be squeezed out of an ever more oppressed productive sector."

"Inflation is "wrung" out of the economy by killing the patient to cure the cold, using the price mechanism to decrease the demand for new money essential to maintain, let alone increase economic activity. Ordinary people are forced into an ever worsening standard of living and quality of life, reducing the ability of government to provide infrastructure, reducing any chance of significant real wage increases, reducing employment and income opportunities for the nation as a whole (the national economic benefit).

Meanwhile, the 'free trade' agenda encourages cheap imports to mask the inflationary pressure, initiating balance of payments problems, which are partly offset by seeking foreign direct investment (mainly through the sale of New Zealand's land, assets and citizenship).

Natural resources are 'used up', leaving future generations with environmental social and infrastructure deficits they may never be able to repay or put right.

Some of our productive companies have moved offshore. We are suffering a chronic 'brain drain' as qualified people leave for greener pastures abroad.

The masking of inflation by such means results from institutional denial, the failure to acknowledge that the financial system is itself fatally flawed."

..."New Zealand's unsustainable current account deficit is the direct outcome of the measures used to mask the true underlying inflationary effects arising from the monetary system itself. Some of these measures are the sale of the nation's assets into overseas ownership, the repatriation of medium term foreign direct investment, and the unilateral reduction of trade barriers. The chickens are coming home to roost from the failed policies of the past 15 years or more."

"...Under current monetary policy, the likely course of action is to join the well documented Third World "export" trade treadmill whereby an ever increasing proportion of our total production is sent offshore in an impossible effort to "pay our way" in the world, while the quality of life of our citizens steadily declines.

Trade is a zero-sum game. The more we are forced into supplying overseas markets for the sole purpose of closing our trade gap, the more we are forced into ever increasing competition with other countries, with a consequent reduction in our terms of trade ..."

"Perhaps the greatest single instability factor on the value of New Zealand's currency is currency speculation, the dissociation of financial transactions from the real economy. In New Zealand something in the order of 99% of all financial transactions are speculative."

"The 'market' is dominated by speculation because there are very few if any controls on the quantity or flow of money. Many individual players in the speculation game have vast financial resources. While speculation itself may appear to be a zero-sum game, the effects of speculation fall directly on the people in the form of currency depreciation and currency instability.

... speculation cannot succeed without currency instability. Instability is the lifeblood of speculation. If you create stability you regain control of the currency."

"[The] introduction of debt-free money is anti-inflationary. ...The proposal requires only minor amendments to the Reserve Bank Act."

"The introduction of a unilateral variable surcharge on currency conversion is a veritable silver bullet. ... A positive surcharge will produce an income stream. Its initial inflationary effect on the price of imported goods can be neutralised by a compensatory reduction in internal taxation, such as a reduction in GST.

The import reductions will help correct the trade balance, increase import substitution and create jobs. It will not affect exports except insofar as the exchange rate alters when the policy is introduced..

Very long term foreign investment will not be hindered, but short to medium term speculation will be stopped absolutely dead as long as the surcharge is positive.

The repatriation of profits and capital abroad will be subject to the surcharge. This will produce a currency regime based on the real economy rather than one based on the speculative paper economy."

"All ... can share in the increased wealth and well being of the country through the introduction of a national dividend. Such a dividend might eventually be expanded into a universal basic income. ...It would increase the purchasing power of ordinary people WITHOUT the need for wage increases.. "