Newsletters : Current Newsletters : 12 March 2010
Thought for the Day

The world wide paper money game roars on unabated. How is it possible for a small country (New Zealand) to thrive and prosper or even survive in such an uncertain world? We search for an answer but we are not certain of finding one.

If we look at our Reserve Bank statistics (on our website) we see that our M3 money supply has been booming ahead ever since they started to keep track of it. It seems that a modern economy can only keep going if we continually increase the money supply - and not by 2% or 3% but by 8%, 10% and even 15% and more. Once or twice in the last 20 years has the money supply dipped into the negative slightly (-0.1%) - until recently.

At the end of November our money supply had gone negative by 1.8% pa, at the end of December it went down by 1.1% and at the end of January it was -4.5% year on year. This is unprecedented. What does it mean?

I enquired of the Reserve Bank who responded in part, "The real sector driver of the slowing trend in broad money aggregates since late 2008 is one of slowing aggregate economic activity, broadly measured by GDP growth, and a correlation, often only weak in econometric analysis in New Zealand, is found over cycles in GDP growth in many economies."

That is, slower economic growth causes the money supply to contract. But isn't it the absence of cash that causes businesses to slow down their activities? - Thus causing a diminution in GDP?

Certainly Obama thinks so as he is solving the slower growth by printing and issuing trillions of dollars.

I find this "chicken and egg thing" a little confusing and will try to find out how this happens. Wish me luck!


Mar 12, 2010, 13:26