Too late for a budget to save us, NZ is broke.

|

Unfortunately, no budget is going to fix the debt that has been built up in NZ over the last 35 years while NZ has been in trade deficit. Yes the government can make it worse by spending too much, something that the population is ultimately responsible for. But the population is the main issue anyway, as government gets its money from them.

The head does not live without the body.

Government has reported net debt of 11.6 Billion, that’s 7% of nominal GDP (174 Billion). While people and business are 273 billion in debt, that’s 156% of GDP!
(Note, I updated these numbers based on RBNZ and treasury numbers, May 27)

So where is the real problem?

You see, if you spend more than you earn, mathematically it is an absolute certainty you will go broke eventually, it’s just a matter of how long it will take.
And how long it will take depends on how long others are willing to lend money to fund that growing debt.

So when will NZ go broke? It looks to me that time is now. So what happens when we don’t have enough income to pay interest payments on all that debt? Well we must sell assets to make those payments. Well guess what is happening now, exactly that. (Housing)

It saddens me that economic commentators in New Zealand do not actually understand money, and have not been able to cast aside the constant noise and a lifetime of incorrect teaching on money to see the logical realities. (I also did not see it most of my life).

The facts:
The total money supply in New Zealand was 100 Billion in 1999 now in 2008 it is 199 Billion, almost all of that increase is in the form of credit for housing (Mortgages). But I’m not surprised as this is how debt money works, there had to be a credit bubble:

(Click image to enlarge)


Take 100 Billion and then compound it monthly with a annual interest rate of 7.5% for 9 years and what do you get? You get 199 Billion! So do readers understand this?
Is it not very clear that Money is Debt (Credit) and that is our system, so the money supply had to expand by its own compound interest rate, and because money is only created in our system with borrowing, debt had to increase, and for debt to increase we had to have something that would increase it's capital valve to back that extra borrowing (Housing).

So as more money came in, so did housing go up, and as housing when up so did the ability to borrow more against that increased capital. In the big picture you can see that was pretty crazy but explainable when you realize how money works.

So the Goverment has had a "surplus" that is toatly imaginary in that it will vanish as if it was never there, as that "surplus" has come form that borrowed 100 Billion coming in to the country. 100 billion of debt that has not been paid for! (Yet)
So in reality that income to the goverment was borrowed money and not a surplus at all. Now without the Body the head will die.

But of course, people can’t just keep on borrowing the housing pyramid scheme up for ever, it had to collapse some time. So here we are, with a paper capital value of housing sitting at 600 Billion and the total money of NZ sitting at 200 Billion.

So where is that 200 Billion going to get it’s interest payments from now? Another bubble? I can’t think what that will be. So if no Bubble what next?

Assets must must be sold to make those interest payments, so asset prices must fall.
Everything is going to be cheap, TV’s, Cars, Houses and boats. Any assets that can be sold will be.

This is a time to be cash rich and asset poor, and gold and silver are even better than cash to protect against inflation at these times.

Debt money, like most countries use these days has a fatal design flaw. The fact that it has no intrinsic value, thus it must pay interest other-wise why would you want it?
And to pay interest on the total money pool more of it must be made at the rate of required interest payments, making it less valuable at that same time. It is flawed to the core.

Debt money (Fiat money) is simply a game about who is more successful at passing their debt onto others, so if you have a lot of it, actually it means that a lot of people owe you money. While Gold on the other hand has intrinsic value, it does not need to pay interest thus it is not a liability and a true store of value.

If we are going to use a flawed debt money system the best set-up is to have low interest rates (1-2%) and tight lending standard (Don't lend unless you are really going to get it back) And anyway, you would make sure of that if you were lending for only 1-2%.

But people being people they can’t control themselves so that is why Gold backed money is best, it cannot be corrupted. You can’t spend more than you have.

After all, if you save and spend, you can save and spend again, that is sustainable.
But If you borrow and spend, you now must pay interest thus your ability to spend again becomes more and more limited.

Sweet at first, bitter in the end that is how debt money works.

Go for Gold Measures!

No Credit Crunch offered by CC companies, just “advances to go” and collect bankruptcy

|

In the below chart you can see that Credit Card debt has escalated, (Note the consistent jumps around the holiday session.

(Click here to enlarge) What you may find more interesting is that CC limits (Total available credit) have expanded much faster than people can get into debt!
As can be seen below NZ’ers still have another 10+ billion of credit card debt to rack up yet!


(Click here to enlarge)


Why are credit limit expanding so much faster that Debt?

Well one reason could be in the way our debt money systems works, borrowing must increase to create more money to pay interest on the total money supply.

See my article here to understand how that works.




Also some earler work I did on the math of a credit bubble can be found here.

NZ's controlling government direction

|

http://www.stuff.co.nz/3992963a10.html
Quote:



Prospective homeowners in the most expensive parts of the country will benefit from a new scheme under which the Government will take a silent stake in their homes.
(This is happening in Australia to) This is a major contradiction in terms, if houses are too expensive then don't buy them until they are affordable, the government taking a stake in the house will only maintain and increase the house prices and push the market further away from those who don't become part owned by the government. It will just trap more people into houses they can't afford at the very time they should be staying out, bringing more bankruptcies on a housing collapse. Yet they won't be able to walk away they will be beholden to the government for their contribution.

When a government takes over ownership of private property and businesses it is part of Fascism, what do you call it when they use your tax money to by the things you own! (Fascism)

This is very bad, taking my tax dollars so the government can buy a stake in someone else’s house! How stupid is that! On top of that I get In the mail today from my share broker the details of how I will need to pay 5% assumed dividend on any shares I own outside of NZ. Then we have the Cullen fund, they will give you a tax break if you give your saving money to the government to invest. So they are not happy just spending your tax money they also want to spend you savings money and own your house!

They have introduced "working for families" a scheme that gets a lot of people on the government payroll that traditionally were not beneficiaries. The government could have just taxed people less so they could have retained their own money and spent it how they see fit.

Now they ahave introducing a anti-smacking law on top of all that so you can't discipline your kids as the governments knows how to bring up your kids better than you do!

I don't think things will get better now, the pressure to become part of the system is building quickly. Inflation pressures are huge and unreported. Middle income people are being squeezed from all directions to become part of the government system. It is unsustainable, change will only be possible when with an economic collapse and at that time people will see that the only option is to change. I hope at that time change is made toward free market principles and freedom again.

Race to the bottom for currencies heating up

|

Global fiat money is turning everything upside down, no one wants a strong currency. Everyone is trying to destroy their currencies faster than the other! Why? Why would people want their store of value to go down in value? A big reasons is that fiat is debt not value, it’s a liability and people are in dept so don't mind the value of debt going down. If they had savings in real money this would not be the case.The NZD, AUD and every other "D" is getting more valuable compared to the US "D" so we obviously an't destroying our currencies fast enough!(The Japanese do it even better the US fed)But look here are some solutions being implemented at the moment:
http://www.rbnz.govt.nz/news/2007/3065318.html
NZ has just changed the Reserve bank rules so they can buy foreign currency without backing from other currencies.Please NZ'ers, understand that this means they will buy USD with NZD and pay high interest on NZD that was made form thin air, all this because we an't wrecking our currency fast enough to keep up with the US and Japan. Crazy, people don't know up from down anymore.And also this:
http://www.stuff.co.nz/4131024a13.html
I'm in Thailand today and I read the paper finding they are implementing a number of measures to destroy their currency faster also:http://www.bangkokpost.com/News/17Jul2007_news01.php
Quote:

The Bank of Thailand will introduce a package of relaxed capital controls this week to curb the continuing appreciation of the baht, BoT governor Tarisa Watanagase said yesterday. The package includes relaxing regulations that control capital outflow for investment and allowing exporters to hold US dollars for longer, instead of forcing them to hastily sell them and put upward pressure on the baht. "Other measures in the package are confidential," she said.

What is up and what is down, what was black and white is now confusing for the masses,

We are just comparing who has the least disgusting fiat currency. So what does it mean at the end of the day.How can we measure a flexible object with a rubber band? Gold & Silver, that’s the measure. Forget about fiat as a store of value, its value is being destroyed right in front of us.

Broken Window Economics

|

This something we have all heard in the media at times, how some disaster is so bad but at least its going to fuel Jobs etc.. be good for the economy.

I thought the Daily reconing. put it well below:


Quote:

Frédéric Bastiat pointed to one: the belief that the destruction of wealth fuels its creation. He explains this by means of an allegory that has come to be known as the story of the broken window. Most famously it was retold as the opening of Henry Hazlitt’s Economics in One Lesson, which is probably the bestselling economics book of all time.


Here is the story:
"A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all-knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items and the circle of rising prosperity will expand without end.


Quote:

What’s wrong with this scenario? As Bastiat put it, “It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In
short, he would have employed his six francs in some way which this accident has prevented">


And I would add: as well as spending the money some other way more useful the shopkeeper would still have his window!



Quote:

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way. “Society loses the value of things which are uselessly destroyed.”

It sounds like an unexceptional claim. But herein rests the core case against everything the government does. Perhaps, then, we can see why the allegory is not better known. If we took it seriously, we would dismantle the whole apparatus of American
economic intervention.

If you are with me to this point, perhaps you have a hard time believing that anyone really believes that wealth destruction
is actually a good thing. Let me try to show that the fallacy is as pervasive as ever.

After every natural disaster, we at the Mises Institute start what
we call the Broken Window Watch.

After Hurricane Katrina, the Labor
Secretary said: “What will happen – and I have seen this in previous catastrophes and hurricanes – there is a bright spot in that new jobs do get created.”

And The Economist said, “While big hurricanes like Katrina
destroy wealth, they often have a net positive effect on GDP growth, as the temporary downturn immediately after the storm is more than made up for by the burst of economic activity that takes place when the rebuilding begins.”

And the New York Times said: “Economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on growth data over the next few months as resources are channeled into rebuilding.”

After last year’s California fires, we heard this. “In the odd nature of economic accounting, this will probably be a
stimulus,” said Alan Gin, a University of San Diego economist. “There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”

And CBS MarketWatch said: “Economists have noted the perverse reality that in the wake of disasters, re-construction spending helps the economy, even as people are still struggling to recover from their personal losses.”

Note that personal loss here is deemed rather irrelevant
compared with the beneficial macroeconomic results. Here we have a theme we find often in economics, the attempt to drive a wedge between what makes sense for individuals and what is good for society. We see this on display in this recessionary environment, when people are told to spend spend spend, even though most people understand that recessions are times for saving.

Continuing on, we find the Broken Window fallacy popping up even after 9-11.

Timothy Noah of Slate wrote: “We live in a very wealthy nation that responds to horrible disasters by spending large sums of money... It will also provide a meaningful Keynesian stimulus to a national economy that, let’s face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it.”

Another economist declared: “Initially, this could provide a significant boost to an economy that had been slumping. The construction industry could benefit from the rebuilding process. There may also be a boon for slumping tech sales, in replacing lost equipment.”

Why Real estate can fall for many years

|

"they don't make land anymore" but there is plenty of room to downsize in real estate. Just because people want a bigger house it does not mean they can have one. In poor countries the poor need many things but they still don't have them. Plenty of room to down size:




People might not like living with mum, dad uncle and kids but that’s how most of the world works. In other words there is plenty of room to downsize thus freeing up housing for an extended time, like it or not. I remember driving along in S Africa seeing new housing built by the government on a hill for some tribe and even though they were new they would have been only about 3M x 2M or 6sq m, just like a mini house but just one room. They were flash compared to some other places I have seen. Real-estate has been a good speculative buy using debt leverage, but I would think 10 years or more before it's a buy again. Look at Japan, I have been there a few times, not much space and lots of people yet housing has fallen for 17 years in a row, so that shows just because people want / need land / housing it does not mean they can afford to have it even when cheep. I hear commentators saying “I have been in real-estate for 30 yeas etc.. this is just a cycle”But that’s just the point they were not around to see that last major cycle (The great depression) most people don’t know what a real downturn can look like, and so It just does not make sense (to them) but yet it happens anyway. Here is a key graph that was published well before the current crash:



Baby boomers become free trading

|

April 2007

Many share holders will know what happens when shares become free trading that have been issued at a lower price than the current trading price. The share price will as sure as clockwork fall based on the following conditions:

1. The number of shares becoming free trading comparative to normal trading volume is large.
2. The different between obtained share price and current share price is large
3. There is no fantastic news that will offset the selling .
4. There are less buyers than sellers

Now imaging a stock that has 40% of its shares in private placement gained at a price less than half the current value that will have these shares becoming free trading starting now and continuously building for the next 15 years, with no fantastic news to be released and worst of all very few buyers. Sounds bad? Well that’s what housing and securities in general look like to me.

To further explain, the baby boomer generation is normally regarded as starting 1946 and ending in 1964 and peaking in 1957. So 1946 makes the beginning of this generation 61 now so we will see the start of the boomers retiring now.
But actually if you look at a population / age chart of a western type country you will see that the boomers start off with a bang, in other words there is a big jump at the start as you can see this in the graph below. Also the number of boomers heading into retirement grows from the jump and continues for the next 10 years at least.
Now this will unlock vast amounts of “paper capital gains” into the market, housing, stocks (mutual founds) etc. This must have an affect on the market.

Remember that assets can only stay up when becoming free trading if there is:
a) Very good news released &
b) There are more buyers than sellers

Both these things are very unlikely for housing as we have a massive monitory mess and are no longer competitive in the global market.
But the main factor is that boomers are relying on the next generations to buy their assets from them otherwise they will have no one to sell to, not only are the boomers a bigger generation but the next generation is broke!
Broke with credit card dept, student loan dept, personal loan debt and many other types of debt and in a very inflationary environment, so who will buy the houses and securities?
Maybe Asian’s will buy US securities but not the housing, and debt riddled young westerners will not be able to afford housing unless it is much cheaper.



Ever increasing house prices is like a pyramid scheme that relies on the next people entering the scheme to have more money than the last, or more of them otherwise it falls over.
And why will they need to sell their stuff? Because of the expense of living, medical bills etc.. etc.. The stats show they sell.

Add: Remember when looking at the above chart to move everything forward by 4 years as it is from 2003.
add:

Boomers are starting to retire now with a jump, and then the number will grow continually over the next ten years.

There is a real mind block in the western world, people just don’t understand the concept of not being able to get stuff that you can’t afford even if you really need it.

Take housing for example I have had many people tell me that houses can’t go down because everyone still needs a place to live, sorry that is just plain Bullocks. If you can’t afford it you can’t have it even if you need it. That is how most of the world works, there is plenty of housing, it’s all relative. Most people in the world have their whole family in one room. Yes it means lowering ones standard of living to reflect the reality, the reality that you cannot live on borrowed money forever. In NZ we have not had a trade surplus since 1973 and we spend a horrific 8% more than we earn, everything will not be fine and will end badly if we don’t turn this around.

From Doug Casey:
See full article: http://goldnews.bullionvault.com/baby_boomers_gold
(If you have not already read this you need to)


Quote:
78 million is the number of baby boomers who are in or approaching retirement. That’s the biggest demographic bulge in U.S history, fully 26% of the population.
And many of those 78 million are in a jam. As they approach retirement, they are still carrying historic levels of debt and, on average, have woefully inadequate net worth -- and much of that based on shaky housing prices.
In fact, 25% of the retiring boomers – nearly 20,000,000 in all -- are facing retirement with a net worth of less than $50,000. You don’t need to be an accountant to see that, with today’s degraded currency and longer life expectancies, they won’t get very far on so little.

Fiat debt money, how it drives countries and lives

|

I first composed & posted this article in June 2007, I have updated the NZ graphs as of March 2008. USA M3 data is no longer Officially available.

Often used terms:
M3 = Total money supply
Usury = Interest payments
Fiat = Debt based paper money with no gold backing ( what we use now)
I think I have reached a new level of understanding about fiat money and usury and want to share this with you all.

These are some conclusions I have come to:
1. Our economies and actions as countries are as a whole driven by usury and everything else is secondary!

2. Increasing interest rates, increase, not decrease the rate of inflation!

3. We can have a major depression and our fiat money may not actually fail.

Some recent investigations / calculations have opened my eyes to the reality, and it does not necessarily end in the destruction of the dollar (on this cycle). That totally depends on our various government reactions to the coming recession / depression.

Some may not know that monitory inflation is inflation of the money supply, nothing else. General inflation of goods & services is not possible without it. So ask yourself, what controls the money supply?

Since we use fiat paper debt money it is only borrowing that can increase that money supply (M3). The only other option is that in a desperate situation a government directly takes control of the printing press creating and spending cash without borrowing. In countries like America and New Zealand who operate in trade deficit and have done so for many years, our share of the debt burden has grown over time, so what affects the amount of borrowing? Some may say it’s lending for housing or businesses may borrow more to fund new life improving technologies, people may speculate on stocks or borrow to go on holiday. People may feel they can borrow more when they are fully employed, governments may borrow to fund social or capital programs. These things and others added together drives a certain level of monitory inflation right? No not right!
There is an overall driver that controls inflation and drives everything we do, its usury and everything we do in fiat is subservient to it and I can prove it!
I have been meaning to try this out for sometime but did not expect the results to be so conclusive, like anything worth doing it took some work. I went back in time as far as I could and using the monthly mortgage floating rates for the last 47 years I then calculated the compound interest on the money supply from 1960 forward on a monthly basis. The results show that the money supply is controlled by the interest rate and is a function of compound interest. Everything we do with fiat is just supporting the usury!
See below the blue line is actual M3 data straight from the RBNZ starting with 1,633 million in 1960 and going to 206,503 million in December 2007. I used New Zealand in the below example as it is simple to show the truth in this small economy, but I also have shown this with US data further on. The pink line is 1960 M3 (1,633 million) compounded by the actual monthly floating mortgage rate. There are a full 656 variable monthly compounding interest rate calculations that finish in December 2007 at (Some interest rates are higher and some are lower than the floating rate, so I used it as a medium example).
(Click on image to enlarge)
NZ money supply (M3) 1960-2007 vs.Compounded 1960 M3

It is best to view compound growth on a logarithmic scale but I have included the below linear graph also to help convey the message:
(Click on image to enlarge)
NZ money supply (M3) 1960-2007 vs.Compounded 1960 M3 Lin

Now without doubt usury drives our money supply inflation, it would be impossible to have these two numbers the same after 656 variable compounding interest rate calculations how could it not. Only small changes during 47 years would make a huge difference by Dec 2006.
This means that usury is the master of people & corporates in debt and their number one activity when its boiled down is frantically feeding moneys inherent interest payments with their slave like work in their busy lives.

Lets take another example, the US money supply going back to 1959. I have taken the actual monthly interest rates from FED data and compounded this monthly over 48 years. As it is difficult to know the exact rate on average that is charged on money, (30y t-bills to 20%+ credit cards) I have put a few options in so we can see that the relationship is too close to deny:(Click on image to enlarge)
USA M3 1959-2006 vs.Compounded 1959 M3
Note that increased activity or anything we do in the “new economy” has never truly broken away from the usury need of the money supply. During the time span above there have been booms, busts, wars, oil crises etc. … where are the big impacts on the money supply? In the big picture it just keeps going like nothing has happened except acceleration / deceleration due to interest rate changes. This is very fundamental, we drift from wars to booms to busts and it all fits within this compounded usury growth, who is the master? This brings a whole new meaning to the saying: “Money makes the world go round”

High interest rates make the money supply grow faster, so high interest rates actually increase inflation. When interest rates go up people need to work harder to pay the interest. This is the same for the entire country, but as money is only produced when borrowed, getting busy means borrowing more.
It can be seen in the below chart, when interest rates are generally rising so is M3 and gold & silver were peaking about 1980 as interest rates and M3 growth were also peaking. Also gold was bottoming out around 2000:(Click on image to enlarge)




During high inflationary times M3 grows faster while the interest rate is higher, this only makes sense when you realize we are driven by usury. High interest rates do not slow M3 growth they accelerate it! That is why gold & silver go up when interest rates are high. See: http://www.financialsense.com/editorials/casey/2006/0720.html

Fiat dollars can never truly win against gold:

There are two reasons for increasing interest rates, one is the often discussed need to cap increasing price inflation in certain sectors but the other less discussed and most likely reason for increasing interest rates is Risk. Banks and lenders in general charge higher interest on loans with higher risk factors, this is specifically to cover bad loans that never get paid back. Thus the growth of M3 is maintained.

Higher risk in economy > higher interest rate > higher inflation rate > faster growing M3 > fiat devaluing faster = higher gold.

Asset price inflation is not money supply inflation.
(Click on image to enlarge)
Value of NZ housing stock1979-2007 vs. M3 (Total money supply)Housing and the stock market could lose more than 70% in dollar value and the money supply may not be savaged!
Housing stock in NZ alone is worth 600 billion, that’s 3 X more than the money supply alone in unrealized “paper gains” add the stock market and private equity to that and the unrealized paper is far bigger than the fiat paper supply.

During a recession moneys usury will still need feeding and assets can be bled and fall to match the money supply over 10 years or so. Only a fraction of the falling unrealized paper assets will need to be purchased through borrowing to support the fiat money supply. Once assets have deflated as far as they can down closer to the money supply, interest rates will lower leading to a prolonged period of stagnation as the money supply needs very little feeding with low rates. Then over time as confidence returns and interest rates rise more money is needed for usury and the whole process can start again, while all the time fiat loses value and usury just keeps growing. If the actual money supply & major banks start falling over the government will step-in to support them and print money as necessary. Governments are so big now they have many ways to give money away, with “strings attached”

So we can sell down assets into a depression, we can be broke, we can have no jobs, little food, no house but the fiat money supply can still get through this and be growing as it only needs to maintain its own compound interest rate and that is far far less than our paper assets. In the great depression some housing lost 95%! The dollar lost ½ of it’s value against gold overnight yet the dollar survived.

Think about this example, a company has 100 million shares, the shares are trading for 1 dollar so the company is worth 100 million. Then 1,000 shares trade for $2 just before close of trade, now the company is worth 200 million, but the money supply did not increase by 100 million.Another example, one house in a street sells for $100k higher than the others have been selling for, now the rest of the houses in the street all go up 100K so that 100K of fiat debt input has pushed up unrealized paper gains 20x or more as a whole.

Just like Fiat has inflated away from gold, unrealized paper gains have inflated away from fiat, so the paper gains will collapse into fiat and fiat will inflate & lose value while gold will rise.

Derivatives fit into this picture also, they are complexly interlinked insurance policies and worth 10 – 50? times more than the money supply so not worth the paper they are written on. But that does not mean the actual money supply will be destroyed with them, no the companies that own them may be destroyed, their value could be totally wiped out and the actual money supply could survive and even grow!
So asset price inflation does not necessarily mean money supply inflation (True inflation) real inflation comes when governments step-in to help out starving people, pay their bills, print money to support banks. So inflation actually increases during these desperate times.

The more a government tries to help out with money it does not have the more inflation will rise. Fiat will only be destroyed with hyper inflation if the government in question goes totally crazy and tries to maintain the former standard of living that was unsustainable. (Germany only did this to print their way out of the insurmountable debt they were in after WWI). But if governments just prop the banks up, do some public works and fund soup kitchens etc. then there will be high inflation but not fiat money destruction. There may be high interest rates and high standards of lending during this time due to the risks. It totally depends on government reactions but it’s the inflation of the money supply that counts in the end.

Fiat will loss value as it always has and the higher the interest rate the faster it will lose value, during the next recession we will no doubt see currency consolidation (NZ/Australia, Pan American etc.. maybe even one with gold backing).

 

©2009 Gold Measures | Template Blue by TNB