What is not clear though is to what extent we have an actual savings problem. Our gross saving is at the low end of the OECD with Portugal and Greece below us along with two nations that might surprise: The US and the UK (page 121). There is also difficulty in analysing the differences between household and business saving. NZ is a country of small businesses and often business and household financials are closely interlinked. There is no definite conclusion around this issue and the report asks for further research into this topic, especially around data collection.

The macro level is really where the problem can be seen. When looking at the growth in national wealth, it’s clear to see that housing revaluations are the key driver (page 127) of growth since 1999. In fact “property revaluations explain nearly all changes in household net worth since 2001 (page 130). This is another way of demonstrating that we haven’t actually created any productive wealth: we’ve simply revalued our housing base and used that to fund increased consumption. That consumption has been funded by debt and that is why we have a serious debt problem.

So can we save our way out of this problem? Looking at the data on household incomes one would have to say “no chance”. Market incomes have fallen (yes fallen) for the bottom half of the population between 1988 and 2007 (page 140). That is simply astounding. This at a time when house prices have risen 490%. This is the cause of the deepening inequality between the owners of property and the renters. Even with benefits added in income for the first four deciles has remained largely the same (page 141).

Poor choices? Or simply no income with which to save. I think we must face the fact that half of our population is existing on meagre income. They cannot save and are likely to be in debt simply by virtue of not having enough cash to afford purchases or expenses outside of the simple basics of living. Those who have managed to get on the property ladder have prospered primarily because their asset has risen substantially in value. That is where their  savings lie. It should be noted though that, for many, this increased wealth is purely on paper.

At this point it might be worth looking across to data from Australia (page 128. Aussies actually have more of their wealth in residential property than Kiwis do (50% vs 46%). Investment in shares in much the same (8% vs 9%). The big difference is in long term assets. Aussies have 19% in Pensions and Superannuation whereas Kiwis have 2%. To balance that out Kiwis have 22% in business and farm assets against Aussies holding just 9%. So for Kiwis businesses and farms are their pensions. This is not an exact comparison but it’s clear that there is not much to separate the two countries other than Aussies invest in public companies and Kiwis keep it private. It also shows that Australia may have the same debt problem we do though they have benefitted more from the commodities bubble than NZ.

The oft quoted statement (from Ministers, the RB and other officials) that Kiwis should save more is somewhat optimistic. Save more from what exactly?

So what can we do? Well we can look at the other side of the savings coin and that is our expenditure. As a country we have essentially borrowed our GDP for the last 20 years. This is reflected in our current account position which has left us with a Net Foreign Liability (NFL) of 85% of GDP. Poor investment and low labour productivity (not sure where the NZBR gets its numbers from) has left is with nearly 40 years of negative current account balances (pages 20-24). The simple explanation is that we have consumed more than we have sold (plus all that accumulated and compounding interest). This consistent deficit should have seen NZ with a consistently weak currency (to allow the balance of payments to correct) but this has not been the case. NZ’s high real interest rates have been attracting overseas investment looking for a high yielding home (page 26). NZ is seen as a safe place to invest and, in an era of low global rates, has seen major inward flows which have not just funded the current account deficit but also the major revaluation in house prices.

The accumulated current account deficit has pushed interest rates thus forcing up the currency . This in turn has made imports even cheaper fueling the spending boom and embedding the circularity of higher prices in the economy (page 39). The bottom line here is that our currency is too high. This has been noted for some time but successive governments have chosen to ignore the problem, hoping that regular comments will help keep a lid on its appreciation. A 2010 IMF study estimated “that stabilising NFL would require the real effective exchange rate to depreciate by 20%”….that’s to just keep NFl where it is now. To reduce “NFL to 75% of GDP over 15 years would require the real effective exchange rate to depreciate by 25%” (page 36).

That would put the NZ$ at between $0.55-0.60. Ouch!

That is the real story to come out of this report. To summarise:

- We don’t save much because half the population has had no increase in income for 20 years.

- The other half have increased wealth due to large revaluations in house prices.

- The top 2 deciles have seen increases in wages and this is where most of the real saving is coming from (if any).

- Debt funded consumption has seen interest rates rise thereby sucking in more investment flows and boosting the currency.

- We have borrowed to live and really have no spare cash to save.

- The best form of saving is paying down debt, both private and public.

- The only way to improve our position is to export more and import less.

- The primary way to export more and import less is to engineer a significant and lasting depreciation in the currency.

- The second option is to develop and invest further in export based industries.

Adjusting tax incentives and boosting Kiwisaver are not going to help us out of this malaise. Only strong and decisive action can help us from here. So what would I recommend? That’s too much for this post but at a high level some of the following (most of which I have written about previously).

- Lower the exchange rate by direct intervention.

- Cut interest rates as well as bringing down the cost of mortgages which are still very high.

- Restrict bank credit by raising asset requirements.

- Build a self-sustaining energy sector.

- Introduce a basic income to replace welfare and superannuation.

- Liquidate the overseas portion of the Cullen Fund (now whilst markets are at 30 month highs).

- Invest more in the productive export sector.

- Oh and let’s have a land tax whilst we’re at it (this was ruled out by the government in the terms of reference!).

Next week: The Welfare Working Group reports…..can’t wait!

Germans are refuisng to accept Euros which have originated from the Latin Bloc, especially Italy. They want “hard” Euros issued by the almighty Bundesbank, that inflation fighting automaton. You can hardly blame them given the fiscal history of Italy, never mind Greece, Spain or Portugal.

But what this shows is the lengths to which people will go to mitigate risk. It seems a waste of time really given that the Euro is universal in its value and acceptance. But its a bit like English and Scottish Pounds. No one ever wanted a Scottish one even though they were both accepted as legal tender by the Bank of England.

Perception is everything and the Germans have long memories of inflationary times.

The sad fact is that if the financial system falls apart nothing will save you. Having a nice pile of gold soveriegns might but the reality is that there wouldn’t be enough to create a reasonable market for exchange. Now a nice veggie garden is more of a goer in times of monetary distress. This is where NZ has a major comparative advantage. Nearly everyone has a patch of dirt in which to grow stuff.

Our central banks have a lot to answer for but promoting home grown veggies is one good thing to come out of this debacle.

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.

These two drivers are causing major price rises in all food groups. This creates what might be called “real” inflation, a price rise in the cost of real goods as opposed to asset inflation which is more of a monetary phenomenon.

This is a real problem because it can’t be solved by the hammer of monetary policy though the myopists in their central bank ivory towers seem to think so.

I can imagine their conversation: “let’s raise interest rates so people eat less”.

In many countries people are exhorted to have more children especially in developed economies where birth rates among the middle classes have fallen. So how can we stop the population expanding and how are we going to feed all these people and do it in a manner than the ecosystem can cope with.

It’s a tricky question. One could argue that food shortages, famine, disease and natural disasters regulate populations. That may still be the case. But can we rely on that and should we given we are more enlightened, well supposedly.

Population growth was for a long time a favourite topic for policymakers but has only recently come back onto the mainstream agenda. There is no doubt that the growth in biofuels has played a major part in this and that governments who have set targets for biofuel supply may well need to go back and think more carefully about how the unintended consequences of this feel good policy will play out.

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.

But with the $ swift decline into obscurity the fans of something more solid than the US Treasurer’s signature on a piece of paper are clamoring fro the return of the Gold Standard as a way of preserving the value of paper and controlling the impulse of bankers to keep printing the stuff.

Well yes that does seem to be a problem. I’ve touched on this before when looking at how the Bank of England experienced several runs just after it was formed. Why? Because they printed way more paper than they had in reserves of gold. So gold or no gold, there is nothing to stop authorities or private banks printing paper or more accurately filling up spreadsheets with lots of numbers.

I’m ambivalent on this gold business. Storage issues, never mind the horrendous process of digging the stuff out of the ground, present problems as do the ability to carry it safely but really its a confidence thing.

Readers of this blog should hopefully know by now that money is an artificial construct. We can make it anyway we like. It’s created into existence in some form in order that we can exchange goods, services and labour in an efficient manner.

It is subject to the laws of supply and demand like any other product or service.

William Rees-Mogg makes some interesting points about it here but the reality is still the same gold or no gold. We must control the supply of money. 1:1 exchange for gold is a way to do that but its so last century. Surely we can come up with a smarter way of doing it.

My favoured approach is for a central monetary authority to issue interest free new money into the system directly. that supply of money (the only supply) could be controlled on an annual basis responding to set limits, constraints and changes in demand, population etc.

Goodbye interest, goodbye inflation and goodbye financial markets as we know them.

Gold bugs or not, we have to do something about the current system before it blows up and makes the 1930s depression look like an afternoon tea party.

I have never been a fan of Monsanto and there despicable deeds have been well recorded. But as we have seen with the impact of biofuels, the whole food production process is changing and judging from the price increases not for the betterment of consumers. A new term has been coined: Agflation

In New Zealand we are seeing the benefits and costs of food price rises. Our diary farmers are raking it in but consumers are suffering. But consumers are taking action; they are eating less meat and dairy; they are reinstating the veggie patch and being more circumspect about their shopping habits.

This brings several benefits: healthwise less meat and dairy is generally good for you; growing your own veggies creates a sense of self-sufficiency, gets you in touch with nature and you get to eat really fresh food; there is a greater focus on food and what you eat with many people finding it cheaper to avoid processed food and make your own from scratch.

Isn’t that what many activists have been calling for for a long time? And the reason that this is happening? The price mechanism.

People respond to price signals. And when the respond they can be very smart about it. There’s a lesson in here for the bureaucrats and activists.

Let’s hope they find it

We know the credit bubble has well and truly burst. We’ve seen it before with Japan but that was really a closed market and the response was non existent thus causing a 15 year depression. We have Central Banks who are very keen and swift to act but will their actions just make things worse. Henry Paulson today said a correction was inevitable given the price increases of the last 5 years.

Nice to know the guys running the country are on top of things….crickey! Can anyone explain what a stable economic system looks like. Clearly the current bunch of economic leaders haven’t got a clue.

Ambrose Evans-Pritchard argues that we are experiencing a 1929 type situation. I think he is spot on. The bailouts we’ve seen recently could well become more widespread. If that happens then quite clearly the stock markets will fall another 10%. The impact on BRIC (Brazil, Russia, India, China) will decide whether the global financial system collapses or not.

Immediate rate cuts will be forthcoming from the Fed, BOE and maybe even the ECB. All this nonsense about watching inflation needs to be ignored. Inflation will keep being a problem but its a diversion. 2 years out and land prices could be off by 30% or more.

Investing now is for the brave hearted, foolish and very wealthy following the maxim “The way to make a small fortune is to start with a large one”.

Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.

They all depend on each other now.

How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.

So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).

But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.

No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.

The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since

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.