Complementary Currencies: A Safety Net for Financial Instability

By Deirdre Kent

As we go to press with our first newsletter, it may well be appropriate to ask what progress has been made in encouraging the establishment of a range of complementary currencies in New Zealand. The answer is very little. Green dollar systems have not died but could scarcely be described as a thriving movement. Though one is in the planning in Lyttelton, there is yet no New Zealand model of time banking, or any of the other possible complementary currencies available. Commercial barter, however, continues to thrive, and Bartercard is now doing part of many land deals in interest free trade dollars. Australia's BBX also appears to be starting branches in New Zealand.

However, the international movement in complementary currencies continues to grow, with more conferences being held, better websites being set up, and a considerable growth of regional currencies in Germany and complementary currencies in Japan where national economies are in trouble. From our organisation Margaret Jefferies and Helen Dew attended a conference in June 2004 in New York and Christoph Hensch attended one in Germany. Another is to be held in Boulder, Colorado in May 2005 at Naropa University.

So what is the political and economic context in New Zealand? In November 2004 we heard our Prime Minister Helen Clark challenging the Leader of the National Party, Don Brash to run an election campaign based on the economy. She spoke of unprecedented economic growth and record low unemployment figures. The budget surplus has allowed more spending on health and education and consumer confidence continues to be high.

Episodes of financial instability often have their origins in long economic expansions. In line with the rest of the developed world, there has been a spectacular rise in house prices, especially in places like Nelson, Coromandel and the North Shore. We know that the commercial banks currently create almost all the country's money supply as they lend money into existence with mortgages and other loans. A quick look at the Reserve Bank website shows that the broadest measure of the country's money supply, the M3, rose 11% from Sept 02 to Sept 04. Residential mortgage loans have risen from $58 billion in 2000 to $84 billion in 2004.

In response to all this, the Reserve Bank has been issuing a series of warnings about the housing boom and the dangers involved if interest rates rose and rents declined. The publication in October 2004 of their first regular Financial Stability Report is a step in raising awareness and debate around financial stability issues. The full report is at www.rbnz.govt.nz/finstab/fsreport/fsr_oct2004.pdf and describes many possible scenarios for financial shocks, including a drop in dairy prices, possible large movement in interest rates or exchange rates, foot and mouth disease or a drop in the housing or the commercial property market. The report draws attention to the largest currency account deficit in modern US history, now 5% of the GDP, and the way it is causing the New Zealand dollar to rise.

Then on November 17th, Reserve Bank Deputy Governor Adrian Orr warned that the rise in New Zealand's external debt in recent years stresses the need for policies to promote the soundness of the financial sector. He warned that many New Zealand households had taken on a great deal of indebtedness. "If things do go wrong, the losses from such a crisis could be severe - and more so now than they would have been, say, ten years ago.

He also said the banking sector has become more geographically concentrated: Australian banks now own 85 per cent of New Zealand's banking system assets (ANZ has recently merged with the National Bank leaving four major Australian owned banks operating here). There is always a risk, albeit small, of a major economic shock that could leave many households without any income to service their debts.

"For policymakers, the stakes are higher now than they have been in the past. These are strong words from a normally temperate Reserve Bank official.

Another indication of the growing concern of the Reserve Bank about financial instability is that in March 2004 the Minister of Finance agreed to an increase in Reserve Bank holdings from just under $4 billion to about $7 billion. (The Reserve Bank needs to be able to buy in case of an attack on our currency.)

So what can we do as members of Living Economies? We can continue to educate people about the range of complementary currencies possible, so that if and when an economic shock occurs, people would know where to go and what to do. More and more people should be boning up on this topic, reading books, writing articles in mainstream and specialist journals, speaking to meetings and generally preparing our population for this possible scenario. Since complementary currencies are designed to complement national currencies their contribution to a stable economy is worthy of serious consideration, regardless of whether or not we face economic crisis.

1) The M3 rose from $127 billion to $147 billion in this period. See www.rbnz.govt.nz

2) Financial Stability Report October 2004 fsr_october2004. pdf. Reserve Bank of New Zealand