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!

Is complete economic union likely? I addressed this back in September 2009 when it was last on the table. What has changed since then?

There has been a major shift in global political alignments. As the shift of economic power has moved from West to East, so has the political spotlight. Back in 2008 I noted cross border acquisitions from the East and that these signaled a major shift to a post-imperial world. That shift has continued apace with China rising to the fore, now the second largest economy in the world. For the ANZAC brothers that has major implications.

Being connected to the ASEAN has helped both Australia and New Zealand define its geo-political position in a post-Empire world, specifically post European Community integration. Asia is quite clearly the major focus in terms of trade and this has seen some interesting reaction from the old allies. This year we had a visit from William Hague, the British Foreign Secretary, along with his Defence colleague, Liam Fox. It was the first visit in almost 20 years and indicated that the UK was taking this shift East a little bit more seriously. Suddenly old friends were very much worth getting to know again. Previous to this we had a semi-royal visit from Hilary Clinton, the US Secretary of State, down under to sign the Wellington Declaration which put NZ back in the very, very good friends corner. And today we see the Treasury heads of the UK and Australia in town to meet with their NZ counterpart. This is of note as it is the first time they have met together.

So what does this all mean? Simply it’s a jostling for position and a reaffirming of old ties in  a very new world. This puts Australia and New Zealand in a very strong strategic position. We are friends of the old and the new world. We are well located geographically…out of the way but close enough. For the ANZAC buddies that poses some interesting questions. Stronger together, weaker alone or carry on as is?

We can see that the CER is being re-negotiated to allow of higher levels of non-reviewed investment which could mean a lift for corporate activity as well as a loss of company control. And this is really the crux of the matter. Do we want to control our own destiny? Lessons from Europe are all too stark in this regard. Sinking economies have no room to lower their currencies and so swing in the wind, completely reliant on bailouts.

Ultimately the people will decide on this, though its clear that further integration around common borders, regulations and practices is likely to continue. At what point does having separate currencies become a pain? Well ask anyone trying to transfer money between the two countries. You would imagine you could shift cash at minor spreads but actually you pay through the nose. Travelex is one the worst players in this market. Even market spreads are quite wide. So there is definitely a cost to doing business which might add up to 1-2% of overall activity.

A nation’s currency is ultimately a reflection of its sovereignty. The ability to issue your own coin is one the the most recognised symbols of nationhood and has often been as an economic weapon in the colonisation process. If you lose that ability then you lose control. It’s as simple as that. The way to overcome that is to just recognise that you are part of something bigger (in this case Australasia) and take the good with the bad. Personally I think it’s a tough decision to make. History tells me that having control over your own affairs is a good thing. But perhaps the mateship bond will swing views the other way. Perhaps it’s already happened. I’ll leave the final word to Peter Costello, the former Australian Treasurer, at the second Australia New Zealand Leadership Forum in April 2005 (“Crisis”, Bollard, 2010, 26):

“You guys in New Zealand have to get real. If you want to be part of a single economic market with us you can forget having your own banking system. Remember, you sold your banks to us: you don’t own your financial system any more. Leave the regulation to us”.

Strewth!!

“

We are starting to hear more overt language from both officials and the general media about the potential for currency way, namely competitive devaluations, capital controls and other measures to shift currencies to where they should be or where officials would like them to be. Sovereign states have always messed with their currencies whether to screw their own people or other nations. It’s always about self-interest. But at some point the beggar they neighbour approach fails and we race to the bottom. There is no doubt that China is the key here but it’s played a very smart hand and has the US over a barrel. The geo-political arm wrestle is at full bore here and we don’t get to see much of it in the news. At some point though the surplus nations must adjust their currencies to bring the trading world back into equilibrium otherwise the whole system will fall apart. Keynes predicted this would happen and its been a 70 year work in progress. Kondratiev would be impressed.

The question is why hasn’t that happened already. You would imagine that a country with a trade deficit and an ongoing current account deficit (swollen by interest on borrowings to cover the trade deficit) would see its currency weaken and surplus countries would see the opposite. THis change in currency rates would, other things being equal, reverse the flow of trade and all would be rebalanced. On paper maybe but in the real “free market” that doesn’t happen. Why? Because deficit countries tend to have higher interest rates (in order to attract the capital it needs to pay off its debts) and those higher yields attract more and more capital looking for a home. So we have the ludicrous situation of one country lending another country the money to buy its goods…….that is not a recipe for long term success….unless you happen to be running a criminal organisation where your goal is to get your clients hooked on the product…..

It’s also known as debt slavery. And it must stop.

So does this mean we are headed for a new Plaza/Louvre Accord? I think that will be very difficult to achieve at the moment. It’s unlikely the Chinese would accept a single focus on the Yuan. It would almost be better to completely realign the whole global currency system where all surplus/deficit currency rates were realigned to new levels. The obvious problem (other than agreeing new rates) is that there would be nothing to stop markets moving rates right back. This suggests capital controls may come into play (Brazil is already trying something here with its bond market) perhaps in the manner of Malaysia.

More over steps such as currency intervention can be a problem unless the stars are aligned in your favour. Trying to weaken a surplus currency is next to impossible as the SNB found to their chagrin when buying huge amounts of Eur/Chf at a time when the market was actually desperate for Chf. The Japanese are repeating the same mistake as the Swiss by intervening, cutting rates, increasing liquidity and generally flapping about in the Yen. At this point in time they have made no progress at all. Why? Because the market wants to own surplus currencies and not the $. At some point $/Yen will collapse which will suit the US though probably not the Japanese.

For deficit countries with an appreciating and overvalued currency like New Zealand there may be better opportunities for influence. More on that net time.

For now though begun the currency wars have.

They also have the money to do it.

As Yves notes the sums involved are getting to the point where a trillion doesn’t raise eyebrows. The Fed’s balance sheet is expanding quicker than a fast food muncher’s waistline. $2trln or will it be 3? Who knows? Who cares anymore? It’s like the end of a Monopoly game where the deals come thick and fast and the rent for landing on Mayfair (or Park Avenue) breaks your bank.

At the same time one continues to hear, in the background, that ecosystem stress is alive and well. As I noted last week there are some major concerns about the level of ecological debt. In a report by the WWF, called The Living Planet, they estimate some $4-5trln worth of ecological damage is occuring on an annual basis.

Deflation, stagflation, hyperinflation, ecological breakdown and over population.

Your cash losing its value every day as the printing presses run wild.

Time for a pause and a lie down.

Not surprisingly the Phillipines, the world’s biggest importer of rice, expressed strong reservations saying almost 3 billion people are rice eaters and calling it inhumane. Oh dear.

One can see his point. But the rise in agricultural commodities is giving producers a great opportunity to flex their muscles for a change and they may see it as one to grasp, especially if they happen to be major importers of oil.

This type of proposal will have many importers worried especially if those imports include oil and rice. We know the impact that the formation of OPEC had on the world economy and coming at at time of global financial instability, this proposal can only add to the uncertainty.

Stories about the Taliban’s treatment of women and those who try to help them are legendary in their barbarism.

Now we hear about the treatment of women in Saudi Arabia. It’s one thing to treat women with violence (we have plenty enough of that terrible behaviour in the non-Islamic world) but the dis-empowerment via lack of rights and education is really unacceptable at the most basic level. It means there really is no escape from a life of slavery.

This extremist form of Islam does a dis-service to mainstream Islam and shows how vast and wide that congregation is in terms of beliefs and practices.

You wont hear anyone in power being critical of Saudi Arabia because their strategic position is so important and of course they buy a lot of weapons and sell a lot of oil. The hypocrisy of human rights and trade is summarised nicely here.

This year it’s the 60th Anniversary of the UN Declaration on Human Rights. The UN better start pulling its finger out before it gets done under the trades description act.

Riots have been seen in many countries now and food, like climate change, is starting to be seen as a national security issue.  The Philipines is facing major rice shortages which is almost unthinkable for a country where rice is a staple. It is also causing serious unrest.

Even here in New Zealand consumers are unhappy about paying 60% more for a block of cheese which has been produced down the road.

Its a difficult situation that will take some sorting out. Producers want the best prices they can get and so will sell into the international market. Subsidies continue to distort the market.

World Bank President, Robert Zoellick has suggested a move away from direct aid and an attempt to remove barriers, create local markets and improve local production.

About time! That’s what i like about Kiva which promotes empowerment and local solutions. That is the way forward. Forget about the huge projects of the 1970s and 80s which dropped so many developing nations into the debt trap. Create a level playing field and encourage local solutions.

There’s been a bit of concern over the human rights aspects of the deal and what it means for workers conditions but it’s really simple to deal with that if it is a concern of yours:

Buy goods that you are happy to buy. Buy Kiwi made or buy ethically certified. But ultimately as a consumer you have the final say on what you purchase. So ask more questions and you’ll find your enquiries work their way up the chain. Business is business and the customer is always right. Over time wokplace conditions will improve and as China becomes more wealthy they will be able to move towards standards we take for granted here.

Lance, Jim and the NBR have all commented on the ins and outs of the deal but I think it’s a positive step to open up markets as it breaks down barriers.

However consumers will always have the final word so we’ll wait and see what the actual impact is.