I agree with this in theory. However, I am doubtful about the governments ability to influence the “supply-side”.

Although I agree with your implicit statement that Treasury appeared to know what it was talking about when it mentioned productivity in its recent briefing.

“The structural imbalance between the economies of the West and the East in the form of large current account deficits and surpluses cannot continue.”

Indeed – it didn’t make sense that the poor were savings so the rich could borrow. Following this crisis interest rates will be higher. Everyone knew this imbalance would stop at some point – but trying to force it to stop would have done more harm than good.

“let’s hope it doesn’t result in trade barriers”

Indeed.

“I think that there is a real fear that once again we will be faced with competitive (and very destructive) devaluations and trade barriers.”

Hopefully it doesn’t.

“How will NZ cope if this nightmare comes to pass ?”

If our access to markets collapses? Well we would suffer a big income loss – which would be no good. However, if protectionism doesn’t turn up we should be fine – except for the higher international interest rates.

These imbalances will be addressed by fair means or foul, let’s hope it doesn’t result in trade barriers but I fear that the US lacks the command it once had to establish a new economic order in the form of Bretton Woods 2. If nations are forced to address these issues inidividually, I think that there is a real fear that once again we will be faced with competitive (and very destructive) devaluations and trade barriers.

How will NZ cope if this nightmare comes to pass ?

when people stop panicing, banks will still exist and will lend again.

The worst thing that can be done now is to try to stem the tide by artificially boosting consumer spending through printing money. People need to be allowed time to save and gain confidence. now is the time to address productivity on supply side rather than prop up demand. New Zealand has the opportunity to do this still but the US and UK seemed to have completely missed the point.

NZ leaders must understand reason has left the market place. the pain will be experienced whatever the policy responses. Using that lack of reason as a selling point to make structural changes that will improve medium term productivity is a sensible short term policy. Things like labour market reform (the least relevant) and capital investment incentives (like 100% tax depn in year one)are sensible. As would massive expansion of a govt backed export credit guarantee scheme.

This is understanding the confusion and using it to advantage to make reforms that might not have been economically or politically possible in a normal environment. Lloyds TSB takeover of HBOS in the UK would not be allowed in normal times.

New Zealand has a high quality brand. It is not in its long term interests to reduce the price point that NZ products command in a panic reaction to current uncertainty. The matured cheddar sold by the dairy board was a side effect of the huge cheese mountain that existed due to a similar short term market difficulty in the past.

Our production volumes are not so large, nor our individual price points so high that consumers will not consider buying NZ product at all. This market is an opportunity to go into markets that were previously difficult for whatever reason. Flexible and imaginative use of funding & contractual terms will go a long way. Letters of Credit have dried up in many markets as banks are unable to fund them rather than individual borrowers being uncreditworthy.

New Zealand debt is sufficiently low as a nation that we can ride out this storm until sanity prevails.

People still need to eat. Companies need to get more competitive by investing in more productive equipment.

For policy to promote easing of credit for exports and gains in productivity there are very definite long term benefits from this crisis.

I used to feel like that.

However, the flip side is that short-term supply is also very inelastic, implying that small shifts in demand can have a big impact on the price that food producing countries receive.

As a result, even if the income elasticity of demand for food is very low the price can still take quite a hammering – which implies that the amount of “other” goods we can buy with our food income could experience a sharp decline.

So, I’d just stick with the usual right of centre policy things like controlling Government spending, reducing compliance costs etc.