Private (Debt) Worries

The Story of Our Economy has been one of Secret – and Occasionally not so Secret – Debt Crises.
Listener 11 November, 2000

Keywords: Macroeconomics & Money; Political Economy & History;

In 1939 New Zealand faced a debt crisis. The government had to roll over £17m of debt and borrow a bit more to pay for imports in excess to export revenue. The Minister of Finance, Walter Nash went to London to obtain the money. The terms initially offered were so harsh that expressions like ‘bankruptcy’ were used. Privately, of course, for the public had no idea how close a run thing it was. Writing up this story recently led me to think just how much the story of the New Zealand economy has been one of secret – and very occasionally not so secret – debt crises. Listing all of them would take more than this column, but many readers will recall the currency crisis of 1984.

The incoming Labour Government was traumatised by the experience, and addressed it – so they thought – initially by floating the dollar, and later selling by public assets and using the proceeds to repay public foreign debt. Today the government hardly owes anything overseas. Unfortunately the rest of us – the private sector – do. Relatively, we are one of the most heavily indebted of the rich countries.

Part of the foreign debt occurs because the country has been spending more than it has been earning, but a big chunk resulted from the privatisations which have swapped public debt for private debt. Now just as there was a theory in the mid-1980s that floating the currency would remove many external problems, there was a related theory that foreign private debt did not matter. It was, after all, the voluntary decisions between a foreign lender and a local borrower. Why should the rest of us worry?

The theory seemed to me to be wrong on at least two accounts. First, it assumed that the government was just like a household, and its decisions would have as much impact on the economy as your or my household. But it is so much bigger, its actions do materially affect the rest of the economy. Second, it assumed that the government was not interested in the welfare of the people. While that may be true for the officials who were giving the advice, it is certainly not true for the politicians.

That the burden of private debt did not matter was being vigorously argued as late as last July in a private meeting I attended. However since the exchange rate collapse in August, the advocates have been reluctant to express that view – if they still hold it – anymore than they are willing to tell us that the exchange rate is just a market price, and it does not matter whether it is high or low. Rather they are likely to say the economy is in a dreadful state, without mentioning for the last fifteen years we have been following the policies they advocated.

No doubt a future historian will report the true situation of our current debt worries. I have to guess. Our politicians are probably being told by overseas investors that they are no longer interested in the New Zealand economy, unimpressed by its poor performance over the last fifteen years, wont invest any more here, and desperate to get their money out, except they cant without taking a huge loss from the exchange rate depreciation. They probably quote generously the advocates of the past economic policies who are badmouthing the economy their policies have created.

I imagine our politicians are responding by reporting the good things happening in the economy (yes there are some), describing the disciplined fiscal and monetary policy they will stick to, and crossing their fingers behind their backs. Walter Nash would know how they felt.

In 1939, Bernard Ashwin, the Secretary of the Treasury, was not with Nash in London but receiving the gloomy reports about our debt difficulties in Wellington. He wrote:

‘I attended Cabinet daily while cables were considered. Each day as the latest cable was read out the first comment came from [Bob] Semple (Minister of Public Works) – ‘Tell them to go to Hell’ – and most of the Cabinet were inclined to support that view. Each time I had the job of pointing out that we were not in a position to do that.’