Possums in the Headlights

We need to do what is necessary now, before we head down Greece and Ireland’s path.

Listener: 5 February, 2011.

Keywords: Macroeconomics & Money;

If you look at countries’ foreign liabilities in relation to the size of their economy, you will see several were bunched together in 2009: Greece, Ireland, Portugal, Spain and New Zealand. Oh, I know, we say we’re not like those others, which have suffered pressure from the world’s bankers, because we have relatively low public (government) debt.

But as Iceland and Ireland showed, private debt, where we lead the other four, can quickly turn into public debt. Hopefully it won’t in our case, but because it could, the credit-%rating agencies have put us on credit watch. (Don’t blame the agencies; they are only saying in public what those who lend to us are saying in private.)

We have a two-sided debate about the state of the economy. On one side is a group of insiders and informed who will find nothing startling in the previous paragraphs; they are already anxious.

On the other, the wider public commentary ignores the warning signs and goes on as if nothing has changed much since 2007. It acknowledges the global financial crash, but because the world avoided another great depression, it believes things are back to normal, albeit in a world in which the East Asian economies provide more of the economic thrust than the Western ones. There may have to be a tweaking of policy but this side’s expectation is for the New Zealand economy to return to an expansionary phase of indefinite “onwards and uppishness” (as Rex Fairburn wrote).

The cautious view is that although we may muddle through, the international receivers are likely to get around to us at some time, and we will suffer the unedifying treatment Greece, Iceland and Ireland are experiencing and which Portugal, Spain and others are lined up for.

It may be merely a matter of “when”, determined by how high we are on the country list, not “if”. The wise thing is to start doing what is necessary now, rather than waiting to be told. The earlier we start, the better. If we do the adjustment ourselves, we can do it at less social cost and more slowly. The international receivers are mainly concerned about their loans, not the quality of life of New Zealanders.

This alternative strategy is sometimes referred to as “rebalancing the economy”. More brutally, it involves abandoning overseas borrowing for consumption, and instead staying within the income we produce while reducing our offshore lending.

That means we have to export more and save more. Everyone is saying that, of course, but aspiration is not the same as execution, although an ineffective response to aspiration may have the international receivers executing us. The world does not owe us a living.

The uninformed public discussion is dominated by those who failed to warn us of the dangers before the global financial crisis. No, I am not referring to those who grumbled that our growth rate was too low. I mean those who did not mention the savings problem, the poor export performance and the rising overseas debt before the global financial crisis – some still do not. To preserve the tatters of their public credibility, they are not going to admit their failures.

We would make progress if, before these people repeated their nostrums, the journalists asked them when they first drew the public’s attention to these issues. That would collapse the optimistic and platitudinous contributions.

But it is election year. The incumbents and their acolytes will give assurances that keeping on keeping on will be sufficient. Meanwhile, the Opposition and its acolytes say the continuation policy needs a bit of tweaking or offer panaceas that address the issues even less. The tone of public comment this year is likely to be “it’s too hard, let’s leave it till 2012”, hoping that the international receivers will be too busy with other countries to turn their attention to New Zealand.

President John Kennedy once found the White House gardeners downing tools at knock-off without completing their planting. “We’ll leave it till tomorrow,” they said, “it takes years for a tree to grow.” “That’s why,” Kennedy replied, “it should have been planted yesterday.”