By Bernard Hickey
New Zealand is facing a horrible bonanza.
The Christchurch earthquake has unleashed a flood of US dollars into New Zealand that is helping to push up our currency. Estimates vary, but most think reinsurance payments from insurers in Switzerland, Bermuda and Britain will total more than US$12 billion over the next couple of years.
Statistics New Zealand has already recorded NZ$11.1 billion worth of reinsurance claims in the September and December quarters.
This may not sound a lot in the context of a NZ$180 billion a year economy, but it is enough to lift the pressure on a currency that also has to handle NZ$50 billion worth of export receipts every year.
Those export receipts are benefiting from record high commodity prices as strong demand from China and India adds to the effects of inflation-causing money printing in America and China.
America's debt crisis is further weakening the US dollar against the New Zealand dollar, which set fresh post-float highs at 88 USc this week. This is a perfect storm for the New Zealand dollar that threatens to wipe out any non-commodity exporters trying to add value.
But this is not the first time this has happened in the world and it's not something we just have to sit here and take. Other countries have thought about and planned for just such currency bonanzas to avoid a phenomenon widely referred to as the 'Dutch Disease'
This situation is named the Dutch Disease after the problems faced by the Netherlands in the 1960s after a flood of foreign currency followed its discovery of natural gas in the North Sea. The sharply rising Dutch guilder slashed jobs in its manufacturing sector, thus turning what should have been an economic positive into a negative.
Norway wanted to avoid the same problem when it discovered oil in the North Sea so it set up a stabilisation fund which parked the US dollars it was earning from the oil in assets held offshore. It is now worth over US$500 and owns 1% of all the world's stocks. The creation of the fund in 1990 prevented a debilitating rise in the Norwegian Krone and helped turn Norway into one of the richest countries in the world.
Elsewhere, Chile has created its own stabilisation fund to deal with a surge of copper revenues in the wake of the Chinese boom. Chile actually used money from the fund to help it rebuild after its own earthquake.
New Zealand needs just such a fund to park the currency bonanza arriving in the wake of the reinsurance funds surge and the commodities price shock. The creation of such a fund was discussed last month at the Treasury's Macro Forum in Wellington.
It would be much harder for New Zealand to create such a fund than it was for Norway and Chile, where the government owns the mines and oil fields that generated the income.
The government doesn't own Fonterra and can't confiscate the funds being transferred to New Zealand's insurers.But the government does need to look at some way to soften the effects of the milk price bonanza and reinsurance flood. It certainly should be trying to save for a rainy day using the proceeds from such a bonanza. Instead, it is just being spent on yet more imports and living for today.
Meanwhile the job-creating export sectors where value is added and high wages produced are withering on the vine.
What's the point of owning an iPad or going on holiday overseas when there aren't jobs for our young people to stay for?
The old will just end up using their iPads and holidays to videoconference and visit their children and grandchildren living overseas.
Poll results this week showing 1 in 5 young New Zealanders want to migrate should be a sobering message for our policymakers.
Doing nothing is not an option in the long term.
Otherwise we are just sleepwalking to poverty.
We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?
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