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.

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