If we are serious about reducing our national carbon emissions, one of the things we must do is switch from a floating currency to a currency tied to the value of gold.
In a recent article, we looked at the fact that NZ is falling behind its 2030 Paris Agreement emissions reduction target, to the tune of a surplus 218 million tonnes of carbon.
Because one tonne of carbon translates to one carbon credit, we will have to buy 218 million international units before 2030, or else default on our obligations. The price of these units in present dollars is now closer to $1.8b NZD (up about $80m NZD since I wrote the article), but if the New Zealand government defers the purchase until 2030 then the price of buying in international carbon credits in order to satisfy our Paris Agreement obligations could easily go up to tens of billions.
Even if we cut our emissions from every other sector apart from agriculture, the result would still likely not be enough to meet our obligations. Agriculture makes up 50% of gross carbon emissions in NZ: beef and lamb are particularly notorious, with a single kilogram of lamb producing as much emissions as a 90 km drive.
Therefore we must contemplate economic measures to incentivise change of land use away from beef and lamb production. The more natural the market mechanism for effectuating change of land use, the better.
Enter the Gold Standard. I recently wrote an article defaming and excoriating Gareth Morgan for his approach to crashing the housing market through his use of abstruse home taxes. His heart is in the right place; but I simply believe that there are better ways to achieve the outcomes he seeks.
An Introduction to the Gold Standard
If you are not familiar with the Gold Standard, you are to be forgiven. The last time a country was on the Gold Standard (as distinct from the Bretton Woods system), was about 100 years ago.
Many European nations including Britain were on the Gold Standard leading up to the First World War. Great Britain was on the Gold Standard from 1870 to 1912. During this time it experienced fairly exceptional economic growth. It also had an annual average inflation rate of less than 0.1%.
Since this is fundamentally a blog about the evils of inflation, I am very interested in how the Gold Standard appears to have provided an antidote to inflation, even during periods of sustained economic growth. Rather than the two being closely related, the gap between growth and inflation over this time period suggests that inflation and growth are at best distant cousins (not siamese twins as certain people would have you believe).
All the Gold Standard is is having the currency system tied to the value of actual gold. Presently, we have a currency that floats freely, but is backed by nothing. This allows institutions such as the Reserve Bank and the Treasury to print as much currency as they like, thereby worsening the downwards spiral of inflation.
I will address this in later articles – for now, I want to concentrate on how the Gold Standard could give effect to green policy objectives.
How the Gold Standard Would Cause the Kiwi Dollar to Appreciate
There are two ways in which adopting the Gold Standard would likely increase the value of the NZ dollar relative to other currencies. These two ways neatly dovetail together.
Introducing the Gold Standard to NZ would make our country a very attractive and safe place for investors to park their savings. The fact that the NZD would be exchangeable for actual gold would give foreign investors unusual confidence in NZ, especially during times of global economic uncertainty.
This would likely cause the dollar to appreciate.
Furthermore, being tied to gold would overall guarantee that the NZ dollar would become an effective long term store of value. This would compare favourably with countries like the US where quantitative easing occurs during times of (perhaps increasingly regular) economic uncertainty.
How An Increase in the Kiwi Dollar Would Stifle Exports
The ‘downside’ of this would be exporters would find it much harder to compete. A rising Kiwi dollar would mean that sales of NZ goods overseas would return far less in local currency. Those exporters who are unable to extract a higher price for their goods would likely go out of business.
How This Would Lead to Reduced Beef and Lamb Production
A higher price and lower profit margins would make Kiwi lamb and beef less competitive overseas. The reduced profits from sales would over time lead to more suppliers exiting the market.
Rather than forcing the government to implement a series of taxes and tariffs on farmers in order to encourage land use, the adoption of the Gold Standard could force land use change indirectly by leading to a revaluation of the NZ dollar.
The downsides of this are not too hard to imagine. Not only would exporters suffer, we would likely find out the hard way the extent to which NZ wealth is tied to dairy and lamb production, among other suffering exports.
Less Beef and Lamb = Less Carbon Emitted
With weaker export returns, agricultural emissions would end up being slashed. Farms would likely go on the market at reduced prices, and suppliers would likely have to seek out alternative business models.
If your sole aim is to achieve reduced carbon emissions, irrespective of economic disruption, then the Gold Standard would go a long way towards achieving that.
How The Gold Standard Would Deflate House Prices
This is a topic that really deserves an article in itself.
A few months ago I wrote an article about how inflation incentivises people to go further into debt, often precipitating negative gearing based on the prospect of future capital gains.
The reverse is also true: If you implement a new tool designed to curb inflation to almost zero percent, then the incentives for assuming massive amounts of debt disappear as well. Using the Fischer equation, the ‘real interest rate’ on a loan at 5% with nil inflation would be 5%. You would have to pay down debts – there would be no way out of it – you could not just hope for inflation to eat up all of your mortgage – and the result for the housing market would be that a great many people just couldn’t be bothered and would likely sell up.
How This Would Lead To Fewer Booms and Fewer Busts
House price fluctuations drive many things. For one thing, they drive the number of construction jobs created, capital assets acquired, and projects undertaken when prices are high, and the number of redundancies, fire sales, and projects cancelled part way through by bankrupt developers when prices suddenly go low.
What is seldom considered is the amount of turmoil and wasted resources that go into the boom-bust cycle.
Smoothing out the boom-bust cycle could be seen as a green outcome in itself.
How The Gold Standard Could Make the Reserve Bank Redundant
A perpetually low inflation rate could allow us to phase out the Reserve Bank over time.
The Reserve Bank’s chief goal is to ‘fight’ inflation. Part of how they do this is through manipulating the Official Cash Rate. Changing the Official Cash Rate is always in some ways counterproductive as it deploys a broadsword to do the work of a scalpel. So a reduced rate of inflation over the long term would give us grounds to limit the purview of the Reserve Bank’s operations.
Many economic theorists feel that Reserve Bank operations actually worsen periods of boom and bust. Again, this is fodder for another article. But if phasing out Reserve Bank activities leads to lower levels of malinvestment, then it can be considered a green objective.
How It Could Inspire Other Nations to do the Same
The most talked about candidate for going back on the Gold Standard is the US. Let’s face facts, though – the US will never go back onto the Gold Standard, because they can no longer afford it.
By comparison, a much smaller nation, with a more limited money supply, a lower national debt, and not to mention a recent $7b fiscal surplus, can afford it.
Coupled with this, there’s the uncertainty associated with making a major economic change in a modern economy. Nobody knows exactly what sort of teething problems a New Gold economy would face.
Just like how we tested EFTPOS for the world, we can again be a trailblazer for other countries. If it works well for us, the case for other countries to adopt the Gold Standard would have a far stronger modern evidence base and would be all but concrete.
How Can We Afford It?
This is truly an article in itself.
Suffice to say that as of last Wednesday the estimate for all available paper money in the NZ economy was $5.52b. The estimate for the total of all household deposits in registered banks at March 2017 was $157.82b. If we were to buy enough gold to cover 8% of these two combined amounts (which is roughly the equivalent of the percentage of your savings that a commercial bank keeps in reserve for its ‘capital adequacy ratio’) then at present day spot prices, we would need to buy in $13.1b worth of gold (rounded to 2 sf).
These are broad figures, and I make no claim they are accurate. (The amount of bank deposits almost certainly will have gone up over the last two months alone.) The proposal would have to be thoroughly costed. We would also have to decide what would be an acceptable margin of safety. 8% may not be enough.
Conclusion
In the interests of balance, I will one day look at the argument against the Gold Standard in NZ. The chief point will be that NZ wealth is tied up in agriculture, particularly lamb and dairy, and a rising Kiwi dollar could be catastrophic for the economy. The second point being that a period of sustained deflation, including house price deflation, could result, and no one could say exactly how long it would last.
Perhaps the most important thing about the Gold Standard, however, is that it could achieve each of Gareth Morgan’s key policy objectives, in terms of curbing the housing market and reducing national carbon emissions, arguably with no “deadweight loss”.
So what effect will introducing the Gold Standard in NZ have on the number of international carbon units we need to buy? This is something I hope to get to the heart of in future articles.
