• Chickens Coming Home to Roost

    “Rock-star economy” is a catch-phrase that has served very well to persuade us that we are doing well in economic terms. But “chickens coming home to roost” and “living in a fool’s paradise” may be nearer the truth about our economic performance.

    First, those chickens.   The warnings that some of us have voiced for some time about our dangerous dependence on a single commodity are, sadly, proving all too accurate. The slump in world dairy prices has exposed the unwelcome truth that our apparent good fortune depends substantially on just one price for just one product – and we now know that the milk powder price will not remain consistently at its recent high levels.

    The charge that must be laid at the door of successive governments is that we have wasted the chance, during the good times, to prepare for the day when they came to an end. Instead of broadening our economic base by developing significant new industries and products, our economy is more dependent than ever on just one industry that, despite its great success and strength historically, cannot be expected to carry the rest of us forever.

    This failure to diversify is not just an error of omission. Ministers may have failed to do much about the problem, other than make the occasional speech, but their real failure is one of commission. Our reliance on dairy products is the inevitable result of the macro-economic policies that governments have consciously pursued over decades.

    Over a very long period, they have quite knowingly engineered an over-valued exchange rate as the consequence of the high interest rate policy they have used as a counter-inflationary tool. They have equally knowingly turned a blind eye to the inevitable consequences of thereby making our goods more expensive than they should be in international markets, including our own.

    Those consequences include a perennial trade deficit that can only be financed by borrowing and by selling assets to overseas interests. And that trade deficit arises because new producers find it difficult to sell over-priced goods into export markets, however good they may be, with the result that our potential growth points cannot get a secure foothold that will allow them to grow and prosper.

    The over-valued dollar has, in other words, killed off or otherwise stifled many of the new industries and products that are needed if we are to diversify. In the end, if we charge too much, it is only our very best and long-established performers that can survive – and even they will do less well in terms of the margins they earn and will struggle if markets turn down.

    None of this is surprising. The economic consequences of the current policy settings are, or should be, well understood. But our leaders either deliberately or ignorantly choose to ignore the damaging consequences of their policies – and then wonder why we have failed to develop a broader base for our dangerously narrow economy.

    And what about that fool’s paradise? It is not just the fall in world dairy prices that has revealed it for what it is. The dairy industry on which we have relied for so long is now vulnerable to a number of threats that we have scarcely begun to recognise.

    As the dairy price has fallen, Fonterra’s travails have shown up in greater relief. They are, of course, partly of its own making, but they are also the consequence of a gung-ho approach to the Chinese market for our products.

    No one doubts that we are now very vulnerable to any diminution in Chinese demand for our products, but what may not be so clear – yet – is that the great benefits we have enjoyed for so long from the success of dairying are in the course of passing into foreign hands.

    The availability to investors – many of them foreign – of Units in the Fonterra Shareholders Fund means that much of the income stream from our dairy industry is now on its way out of the country. Even more importantly, an increasing proportion of the industry itself is being acquired by foreign interests. The proportion of milk production now being handled by Fonterra is falling steadily as foreign – and largely Chinese – owners of New Zealand dairy farms choose to bypass Fonterra and market their product directly into the Chinese market.

    This development, too, should come as no surprise, but it has clearly never occurred to our naïve government. Yet, it is clear that – as we see from Chinese acquisitions around the globe in industries of much greater importance than dairying – the Chinese aim across the board is not merely to buy the products they need but to acquire and control the productive capacity itself.

    To make this point is not to criticise. The Chinese are perfectly entitled to pursue their own interests. But we should surely be equally ready to recognise what is happening and to take appropriate action. The dairy production which has sustained us for so long may soon not be ours to rely on. Sadly, fools do not enjoy paradise for long.

    Bryan Gould

    12 June 2015.

     

     

     

1 Comment

  1. Tom says: June 12, 2015 at 3:50 amReply

    I just put those thoughts onto a Herald online discussion today, not quite so eloquently but the message is the same.
    Ultimately it is the ponzi scheme financial system that we seem beholden to that will be our downfall. We borrow money out of overseas markets and pay interest on it. The US, EU and Japan have been printing money like lunatics yet when Russel Norman suggested something similar to fund the Christchurch rebuild he was ridiculed. These idiots who gave him such grief fail to see the irony in this.
    We are being taken over, slowly but surely through economic stealth. Our assets are being sold, our property is being driven into an extremely dangerous bubble and our land and farms are slowly being sold off for the benefit of a small minority. When the masses finally wake up it will be all too late and the majority will be slaves and tenants in their own country. John Key and the National Party are personally responsible for this as history will show. The muskets and blankets of the early 1800s will look like a good bargain compared to what our grandchildren will be left with. Madness.