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Circa 1922 shopping trip for a loaf of bread.
Courtesy of webofdebt.com/articles/hyperinflation.php
by Ferdinand Balfoort
TINZ board member
Transparency Times regular contributor
Adam Smith already warned us about the risks of inflationary policies, which is what Quantitative Easing (QE) is, albeit with a novel technical term, as described in Part I of this article published in the October publication of the Transparency Times and includes a description of QE. In the good old days, we would call QE a policy of “printing more money” This conjures images of the Weimar Republic in the 1920’s and frantic Germans pushing wheelbarrows filled with worthless paper money to the bakery to buy a loaf of bread. The reason we don’t see wheelbarrow pushing customers queueing in front of New World in Wellington is because inflation is curiously flat. Part of the reason may be that property inflation is not part of official inflation statistics compiled by governments, including our own. This flatness of inflation is in contrast to the hilly landscape of Wellington, which may be another reason for not wanting to push a wheelbarrow for your daily shopping expedition.
Neo-classical economic principles apparently include sleight of hand.
Original art courtesy of Robisto - rsh5096.tumblr.com/
A rising tide of QE does not lift all boats, contrary to what US President J F Kennedy stated in 1963, especially if there aren’t enough lifeboats to go around and we have hit an iceberg. In the case of New Zealand, the rising tide of credit created by the QE may well sink our ship. This news is continuing to be ignored by our political and economic elites, and certainly by those who own assets which are being inflated at unprecedented rates. I don’t expect an Invisible Hand to pluck S.S. Godzone from the malaise anytime soon.
One reason why some boats rise and others sink is that, while credit flows into property and financial assets, there is a comparative drought in investments channelled into new productive ventures. These ventures hold the promise of creating new technologies and jobs, followed by consumption by salaried employees. Theirs remains an unfulfilled promise due to the lack of available credit. Continuing the maritime theme, the Ancient Mariner may well have said, “Credit, credit everywhere, but not a cent to find for productive investment.” In a miserable tandem of whammies, property prices are rising while at the same time there is hardly any growth in employment opportunities.
The New Zealand government’s policy towards economic immigration from other parts of the world means that we are importing the natural results from QE into our own New Zealand backyard. Whereas Canada, the United Kingdom and Australia especially, contain major sized cities that are part of relatively sizeable populations, New Zealand is a minnow in the global national population stakes. This means that the impact of the economic consequences arising from the flood of QE generated funds hits much harder in our beloved Godzone. As Adam Smith noted, “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.” (Adam Smith, The Wealth of Nations, 1776). In New Zealand’s case, the rent will increasingly have to be paid to landlords that are not even in New Zealand, including overseas corruption suspects.
This is because QE has also increasingly generated corrupt and illicit wealth globally. This hot money finds an easy way into professional trust accounts and then into property, where it is possibly even less likely that questions are asked about the source of those funds. On our own shores we have recently seen the legal case of Sir Ngatata Love who was noted to have received NZ$ 1.5 million as a backhander in a corruption case. Although the case has been reported as fraud it should be classified as a corruption case, following the OECD definition of corruption as abuse of power. It involved the use of Sir Love’s public position for his personal financial gain. The corrupt funds were paid by a property developer and, coincidentally, then re-invested into a personal property in Wellington. This underscores the temptations posed by the inexorable rising of property prices, which rationalizes the act after succumbing to the temptation. Similar property related corruption scams are evident globally.
As TI UK noted in its report titled em>Corruption on your Doorsteps (2016), the “high end real estate sector is particularly vulnerable to money laundering, in part due to its capital intensive nature.” It is no surprise that the sector therefore attracts criminal attention, as cases noted in our sidebar. This includes internationally financed criminal gangs such as the one apparently involved in defrauding royalty in Romania, Brazil Petrobras corruption funds invested in London and Leeds, and Malaysian spending sprees in the US property market. Due to the magnitude of sums involved, some commentators now refer to “Grand Corruption” to emphasize the enormity of corrupt deals involved. (The Independent, 04 March 2015). Future Transparency Times articles will investigate Grand Corruption in more detail.
You read it here. Hot money is a natural end result of QE and it is now in the process of blowing up New Zealand’s hallowed traditions and social harmony that was based on an egalitarian society. It is time our political and business leaders addressed this growing social time-bomb. Otherwise we may well all end up strangers in our own lands.
“It is not these well-fed long-haired men that I fear, but the pale and the hungry-looking.”
(Attributed to Julius Caesar, Plutarch, Life of Anthony, 75 A.C.E.).
About the author: Ferdinand C Balfoort (MCA,CA,CIA) is an international corporate governance expert with academic and professional expertise and interests in cross cultural impacts of corruption, economic history and the Scottish Enlightenment philosophers.