Savings (Working Group): There aren’t any.
February 20th, 2011I’ve finally finished wading through the paperweight (as is the norm) aka the Savings Working Group report. Having read the initial commentary, I wasn’t that excited about the prospect but often in these reports there are useful nuggets of information. The main noise is around saving more and adjusting savings incentives especially to promote Kiwisaver.
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!
Tags: current account deficit, debt, forex, housing, income, inflation, investment, kiwisaver, money, new zealand, productivity, saving, savings working group, trade, welfare
February 20th, 2011 at 9:55 pm
For in-depth analysis of savings by sector (i.e. household/business/government/etc, you’ll want to look at the Institutional Savings Accounts published by Statistics New Zealand http://www.stats.govt.nz/browse_for_stats/economic_indicators/nationalaccounts/institutionalsectoraccounts_hotp99-08.aspx
I was personally a bit frustrated that the Savings Working Group wrote that report as though there were no official measures addressing the different savings rates of households and businesses.
February 20th, 2011 at 10:52 pm
Hi Jodi,
Thanks for the information. You are quite right that the SWG seemed to have issues over the data available. I think there is room for some more detailed analysis around the available data and what it actually means. Maybe a job for the Stats people?
My concerns are very much around the macro issues but if we can improve the debate via better presentation and exploration of the available data then that will be very helpful. NZ is not alone in needing to upskill in financial literacy and any help statisticians can provide would be most welcome.
February 24th, 2011 at 1:28 am
Hey Raf,
The Savings Working Group, bear all the the hallmarks a continuation of the 1980′s neoliberal ideological crusade.
The findings of the report of the Savings Working Group are reminiscent of the beneficiary bashing of previous National Governments, merely Old Wine in New Bottles.
I’d actually describe neoliberalism as a religion with its Creed (the Washington Consensus) and its missionaries (Heritage Foundation, Business Roundtable) so any attempts at reasoned debate with these fanatics is an exercise in futility.
It appears the neoliberals are gleefully capitalising on this crisis to ram through their favored reforms under the aegis of “austerity” as I warned you they would back in 2008. Its definately part of their modis operandi as explained by Anne Krueger, First Deputy Managing Director of the IMF.
“Crises force significant policy reforms on a government. Hence my reference to a dangerous moment. In a crisis, there is little enough time to act, let alone think. The exact nature of the crisis will determine what reforms are needed and in what order.”
http://www.imf.org/external/np/speeches/2004/091004.htm
Unfortunately the New Zealand public has always been susceptible to Pavlovian conditioning from their rulers and have displayed a remarkable fortitude in bearing a degree of turmoil both social and economic that few publics elsewhere would be willing to tolerate as long as those is charge confidantly reassure them that they know what they’re doing and that it its just a brief period before things stabilise and we move onto better times ahead. Take the example of this statement of a foreign dignatory during the recession of the 1980s precipitated by the last round of public reforms.
”I couldn’t believe a Government could be re-elected on these indicator numbers,” a Western diplomat said. ”Nineteen percent inflation, unemployment at its highest point in history, real incomes down. Just about every number that could be wrong was wrong.”
http://query.nytimes.com/gst/fullpage.html?res=940DE5DE133CF937A15751C0A96E948260&pagewanted=all
A profoundly distrubing exposition on the phenomon can be found in a speech by Adolphus Huxley who wrote Brave New World, which he delivered at the University of California at Berkley in 1962.
In this context I would like to mention the extremely interesting chapters in Dr. William (sounds like Seargent’s) Battle for the Mind where he points out how intuitively some of the great religious teachers/leaders of the past hit on the Pavlovian method, he speaks specifically of Wesley’s method of producing conversions which were essentially based on the technique of heightening psychological stress to the limit by talking about hellfire and so making people extremely vulnerable to suggestion and then suddenly releasing this stress by offering hopes of heaven and this is a very interesting chapter of showing how completely on purely intuitive and empirical grounds a skilled natural psychologist, as Wesley was, could discover these Pavlovian methods.
http://tribes.tribe.net/infobunker/thread/2cdea7ff-9397-49bd-9aa7-0950a9add86a
I believe obvious parallels can be found in the analysis of the conduct of the Great Awakening preachers and the modern day purveyors of political spin.
February 24th, 2011 at 1:57 am
BTW the Central Bankers of Iceland and the IMF were only too aware of the potential pitfalls of their policy prescriptions for the economy that they were supposedly responsible for.
“That is to say, these special conditions have inspired new investors, the carry traders, to venture to our shores. These modern-day Vikings try their fortune in distant places in the hope of quick gain and handsome returns, which they can no longer find closer to home. What will happen when these bold hunters of yields and expectations suddenly lose their nerve? Or their appetite? Regardless of whether this is caused by events that have occurred somewhere else and under completely different conditions from here, or due to persistent rumours, speculation and theories about the situation in Iceland and risks that have little or no foundation at that time. Will they load everything aboard and sail off, like the Vikings in the past, with what they have managed to gather up, and look for shelter with their bounty against real or imaginary threats? If this happens, might the high-yield countries suffer a shock? And if so, will that shock be felt the most by the smallest countries, where investors naturally have the least knowledge and confidence? Then the question will arise about the impact that all this will have on the effectiveness of the Central Bank’s policies for controlling inflation developments, and whether we might be better off locked away inside one of the super-currencies, obeying the laws that apply there and at the mercy of the decisions of others.”
Opening address by Davíð Oddsson, Chairman of the Board of Governors of the Central Bank of Iceland, at a conference in Reykjavík on The Challenges of Globalisation for Small Open Economies with Independent Currencies
http://www.sedlabanki.is/?PageID=287&NewsID=1491
February 24th, 2011 at 2:39 am
James, I miss you fabulous and incisive commentary. Please feel free to send me blog posts and I will post up under your name.
I completely agree with your conclusions. People really are unaware. They are often taken in by very superficial appearances and fail to understand even at a basic level what the implications of policies are.
I’ve been trying hard for so long to effect some change, some debate but really it is a struggle. Maybe peaceful, incremental change is no possible: the embedded power structures are too strong and too well entrenched. As you say the great spin merchants of the past showed what really motivates people: fear and greed.
Some are motivated by the public good but not enough and as we have seen in the past, this motive can be abused also. John Gray explored this in “Black Mass”.
http://newhumanist.org.uk/1423/through-the-looking-glass
If you have any new approaches I would be glad to hear them.
Best wishes
Raf
February 25th, 2011 at 6:16 am
Hey Raf,
Much relieved to know you’re safe and well. Hope the same could be said for your loved ones.
I appreciate the praise and your generous offer. Not sure I’ll be able to take it up, because I am about to start studying through Massey University next week so may be busy. Yeh finally bit the bullet and accepted I’d have to commit to one thing.
“I completely agree with your conclusions. People really are unaware. They are often taken in by very superficial appearances and fail to understand even at a basic level what the implications of policies are.”
“Unfortuantely people are so trusting that they let the neoliberals spin fairy tales reminiscent of the Brother’s Grimm’s best to cover their only too apparent failures. Take the case of Chile in the 1980s.
Cinderella’s Fairy Godmother, Tinker Bell and General Augusto Pinochet had much in common.
All three performed magical good deeds. In the case of Pinochet, he was universally credited with the Miracle of Chile, the wildly successful experiment in free markets, privatization, de-regulation and union-free economic expansion whose laissez-faire seeds spread from Valparaiso to Virginia.
But Cinderella’s pumpkin did not really turn into a coach. The Miracle of Chile, too, was just another fairy tale. The claim that General Pinochet begat an economic powerhouse was one of those utterances whose truth rested entirely on its repetition.”
“In 1973, the year General Pinochet brutally seized the government, Chile’s unemployment rate was 4.3%. In 1983, after ten years of free-market modernization, unemployment reached 22%. Real wages declined by 40% under military rule.
In 1970, 20% of Chile’s population lived in poverty. By 1990, the year “President” Pinochet left office, the number of destitute had doubled to 40%. Quite a miracle.
Pinochet did not destroy Chile’s economy all alone. It took nine years of hard work by the most brilliant minds in world academia, a gaggle of Milton Friedman’s trainees, the Chicago Boys. Under the spell of their theories, the General abolished the minimum wage, outlawed trade union bargaining rights, privatized the pension system, abolished all taxes on wealth and on business profits, slashed public employment, privatized 212 state industries and 66 banks and ran a fiscal surplus.
Freed of the dead hand of bureaucracy, taxes and union rules, the country took a giant leap forward … into bankruptcy and depression. After nine years of economics Chicago style, Chile’s industry keeled over and died. In 1982 and 1983, GDP dropped 19%. The free-market experiment was kaput, the test tubes shattered. Blood and glass littered the laboratory floor. Yet, with remarkable chutzpah, the mad scientists of Chicago declared success. In the US, President Ronald Reagan’s State Department issued a report concluding, “Chile is a casebook study in sound economic management.” Milton Friedman himself coined the phrase, “The Miracle of Chile.” Friedman’s sidekick, economist Art Laffer, preened that Pinochet’s Chile was, “a showcase of what supply-side economics can do.”
It certainly was. More exactly, Chile was a showcase of de-regulation gone berserk.”
“So there we have it. Keynes and Marx, not Friedman, saved Chile.
But the myth of the free-market Miracle persists because it serves a quasi-religious function. Within the faith of the Reaganauts and Thatcherites, Chile provides the necessary genesis fable, the ersatz Eden from which laissez-faire dogma sprang successful and shining.”
February 25th, 2011 at 6:16 am
http://www.gregpalast.com/tinker-bell-pinochet-and-the-fairy-tale-miracle-of-chile-2/