New Zealand joins its larger and more illustrious economies, the U.S. and the U.K., on the slippery slope with the release today of pretty poor employment numbers. 29,000 jobs lost is no small number for a small economy and with retail numbers looking very soft as well, the Reserve Bank will soon be reaching for the “cut” lever on its interest rate management dashboard.

Regardless of the credit crunch, employment really is the key to how the economy will fare. As long as people are employed then somehow they can get by and service their debts. Well mostly. But now this will see a deeper problem emerge and that is one where people simply cannot service mortgages or debt in any way.

This will reverberate throughout the whole economy. Added to this is a report out today showing house sales down 40% in the last quarter and 53% lower last month from the previous year.

Ouch.

We’re starting to see real signs of a weakening house market here in New Zealand. Sales for Auckland’s top real estate company are down over 50% and a recent auction saw a 6% clearance rate.

I decided ton investigate this myself in Christchurch and looked at some properties recently. One i saw was a 3 bedroom unit which had been bought for $375,000 a year ago. It could be rented for about $350 a week maybe a bit more if it had some money spent on it. It wasn’t in great condition but looked a reasonable investment property.

It was auctioned yesterday and passed in at $317,500. It still hasn’t sold.

We’re not really seeing this come through into prices yet because we only get the median price which is often misleading. In fact it can go up if a few properties sell in the higher brackets and none in the lower levels.

But it’s clear that prices are falling quite heavily in many areas and there is a buyers strike on at the moment.

Although there is the belief that property prices increase regardless the market is clearly starting to realise that capital gains are not guaranteed and therefore investors are starting to look more closely at the maths.

Mortgage rates are 9.5% for 2 years fixed. Yields are 3-5% and prices are falling. Even with the negative equity tax break that’s a big yield gap to fill. There is also the issue of not being able to borrow 100% of the price anymore.

With many fixed rates rolling over this year to much higher rates, the squeeze is really on. This will really start to impact when banks ask for properties to be revalued and then ask for extra equity.

Property investors, like banks, are facing a major liquidity crisis.  Price falls of 10-20% may not be as outlandish as previously thought.

Keep going guys, Alan Bollard pleads. He asks banks and businesses not to hibernate. What?!

Is he suddenly the Finance Minister? It’s really quite odd to see a central bank governor talking like this especially since the last few years he’s been going on about house prices and overborrowing without doing a great deal about it.

Now he’s saying don’t let credit constraints get in the way.

At the same time the Commerce Minister tells investors to get savvy or get “burned”. I love it especially from a Labour government where many ministers have invested in property themselves. Financial literacy? We’d certainly like some.

The facts are very simple. Too much leverage, much of it unseen, caused an asset bubble. That bubble is now deflating and there will be some major fallout. Add to that concerns over global food and energy prices and you have a perfect storm. So for banks now to put the shutters up whilst they count the cost is simply sound business practice.

Westpac has already adjusted its loan criteria. This just fuels the need for lower house prices and demonstrates the role that banks have played in the boom. Yes the interest rate is important but only at the margin. The real issue is how much will they lend: 100% or 65%.

It’s a big difference in what people can afford to pay.  Now landlords have the power as they can raise rents and people will just have to bear it. So along with an increase in mortgagee sales we will see an increase in rent arrears if rents increase beyond peoples’ means.

So it’s a bit late for the officials to weigh in with their comments. They have had plenty of time to look at banking regulation and have completely missed the boat.

I’m trying hard not to overuse the word “tsunami” but it just fits so perfectly. It’s powerful but can’t be seen until its almost upon you but it can be felt. Witness the animals who headed for the hills before the Tsunami of Christmas 2004. Animals have a different vibration, a different level of energy and resonance which enable them to to be more fine tuned to natural disturbances. Humans have lost that ability, well most of us.

So it’s hard to realise what may be coming our way. Listen to the Westpac economists predicting more rate rises on the back on a very tight employment situation, burgeoning inflation and booming commodity prices. The Kiwi (NZ$) continues to surge forward to record highs against the US$ on the back of very high interest rates. So what is the problem.

Household debt is the major concern here, the fault line as it were. Stories today and from the past week lead me to believe serious problems are now emerging: The Joneses going under because of a slowing real estate market; a serious downturn in house prices where sales below the Registered Valuation (RV) are happening; people being kicked out of their homes; water shortages for farmers; a very strong currency; interest rates really starting to bite; banks having to go to the market to raise money to shore up balance sheets; layoffs on the increase and business confidence sinking.

Yet commodity prices continue to rise: oil, food and metals.

It’s not a pretty sight. What’s a central banker to do? Raise interest rates to squash inflation? Of course they will but maybe if they take their heads out of their discredited forecasting models they may realise that actually people are being squeezed left, right and centre. They don’t have any more money even to pay higher bills never mind higher interest rate charges.

We can’t change the fact that we have experienced a money supply induced asset bubble but we can change the way in which we deal with it.

Bollard be brave: if you need to do anything to interest rates just cut them. If you can’t see what’s coming then close your eyes and feel it.

The credit inspired boom of the last 15 years is now over. Markets are in severe dislocation and whilst underlying economies are very sound there is a serious problem in global banking liquidity.

On the good side we have record low unemployment and company profits are in good shape. But the driver of that has been consumption driven by an expanding money supply which has driven up asset prices and created a wave of paper wealth.

Interest rates have been hiked up to halt this boom. It’s too late. The record low rates in the US over the last 5 years created easy money that was too good to refuse. As rates were jacked up people realised they hadn’t done their sums properly.

Wave after wave of derivative offers, capital guaranteed notes and other “too good to be true” offers have come pouring forth. There is nothing so easy as making money out of money.

But mathematics will always intervene. Compound interest takes no prisoners in its tsunami like advance across personal and corporate balance sheets.

The central banks now have no option but to step in and sort this mess out. The risk of systemic crash is clearly a possibility now, not just in stock markets but banking systems.

Whether markets can recover from here is a moot point. They always do eventually whether its months or years.

If the consumer goes to sleep expect a recession plain and simple. It wont matter where you are or what you do.

The important point is that our financial systems need a serious revamp. The gross expansion of the global money supply, condoned by the global central banks, needs a full inquiry.

Nothing less will do.

Local government rates go up followed by interest rates.

Energy prices go up followed by interest rates.

So people are made worse off by increases in prices for goods and services that they cannot easily deflect or cut back on. That’s hard.

But wait there’s more, like a boxer climbing off the floor after a big punch they are hit again even harder by interest rate rises.

And to cap it off it’s all their fault.

I must be missing something here.

The only result of this type of policy is a regular cycle of boom and bust with more and more people forced into bankruptcy for no good reason.

It could be argued that interest rates should be cut in this scenario so that people are not forced to seek higher wages to compensate.

The main concern in the inflation issue is asset and commodity prices. But really its asset prices that are the culprit. They have been driving the global economy for many years now, most notably since financial deregulation in the 80s.

Talk has surfaced recently of the Treasurer invoking a clause in the Reserve Bank Act to move the inflation target aside in order to focus on the exchange rate. Whilst this is a bit far fetched it is another symptom of the policy malaise NZ is facing.

The Reserve Bank Governor has made the same mistake many others have before him: not understand the role and process of bank credit.

It’s as simple as that.

Using an inflation target to manage an economy is like riding a bike with one eye closed. Eventually you have a write off.