The grand illusion.


I think many countries along with NZ took a wrong turn in the year 2000, you could say they collectively went down the wrong track. This article is not about blaming a group or particular individuals but rather looking at what’s happened, then considering what may happen next.

After the March 2000 Dot Com crash we came to a fork in the road, on the left a big boring sign said “Invest in productivity, production, materials, goods and energy, while cutting back on unnecessary expenses.” To the right the sign said “7 year housing party, no cutbacks spend up large!”

We know what road was taken, no one seemed to lose during this time, a lot of people still say “look how well we have done” especially the governments as they pronounced record low unemployment and high consumer spending. “Look how well we have organized this country we have increased government social spending and at the same time we have transitioned into a service... no a knowledge economy”. “We will design, while they sweat, and that’s how it should be right? We cannot compete, so why try to stop manufacturing jobs leaving, look we have the lowest unemployment in 30 years, we don’t need to produce things in this modern economy. We can even have trade deficits continually, spending more than we earn for decades, and now we are doing better than ever.”

Simple logic says: If debt doesn’t matter then how can money? We can’t have it both ways. Either money does not matter and neither do debts, or money does matter and so do debts.

But why have we had so much success while getting into debt, for example low unemployment. Well that’s easy to explain, money was borrowed from our future earnings to pay people now. What? So we borrowed money to employ people, so they could pay taxes and build houses? Yes!

While collective borrowed money was collectively paying bills, the illusionist was working his magic. While people watched the pretty assistant doing the credit jig, he made manufacturing & productivity disappear, they did not notice it, or even morn the loss, they were having too much fun on the magic money-go-round.

Let’s look at New Zealand as an example, why New Zealand? Because it’s a small modern economy that basically does what all other western countries are doing, similar laws, accounting standards and similar culture (When compared to the East) and we are not big enough to lie about our economy, (Apart from the CPI) M3 data is freely available. NZ is like a cell where we can watch the incomings and outgoings, I believe NZ is watching the same great illusion as many other countries whose populace has more personal debt than annual personal income:

* UK
* South Korea
* Canada
* Australia
* Spain
* Netherlands
* Iceland


There are likely more but you get the picture, any country with a housing boom and increasing private debt are in this situation. If anyone disagrees with one of these countries being included, or has others to add please make comment. Some may be surprised to see the likes of Canada and Australia in that list, but actually when you look, private debt is the problem not public (USA has both). Private debt is much bigger than public debt and governments get their tax money from private citizens, so how does the head live without the body?

It seems any country that had a future has sold it already, well at least for a decade or so.

Below we see New Zealand’s national current account . What we earn compared to what we buy, this includes government, business and private accounts:

(Click image to enlarge)

NZ current account balance as % of GDPYou can see this is not a pretty picture, consider that the total money supply is 200 billon now. The green area represents spending a nominal 140 billion more than we earned over 40 years. The last surplus was in 1973. It is actually worse than this due to the way GDP is reported, its part of the grand illusion. GDP measures all expenditure by businesses, people and government + (exports - imports), however the 80 billion that was added in housing debt since 1999 is not included on the import side! So imported debt shows up as GDP when it it’s spent, it makes us look productive! Productively getting into debt! Crazy. Really the above graph should look much worse, again that goes for many other countries also.

Now if an individual operated like this they would be bankrupted long ago, so how can this work? How can countries keep spending more than they earn?
The wheels of a country turn more slowly than its citizens, things take longer than we expect them to in human terms, this works both on the up and the down.

If that borrowed money is not productively used, the money-go-round becomes difficult to stay on, as increasing debt money demands increasing usury payments to stay ahead. If a country is in current account deficit not only does debt money’s usury add to debt, but the deficit in trade is added also. It can not continue like this, eventually an inflection point is reached were assets must be sold to pay the difference.
While people borrowed willingly to provide the necessary usury payments on a compounding debt money supply all seems well, but when people reach debt saturation (They can’t afford to borrow more), then who pays the required usury on debt then? It can’t just not be paid, either export more, spend less, sell assets (to foreigners) or go bankrupt. All four are likely.

OK, but countries like Australia, Canada, and New Zealand are commodity producers, we should be doing OK right now. So lets look at the balance of trade in goods and services alone:

(Click image to enlarge)NZ balance of goods and services

  1. Three things of note:
    We have had positive trade balances (goods and service) on and off, as recently as 2004, so the picture does not look so bad.
  2. It can clearly be seen that we transitioned to a service economy in 2000 for the first time. (Along with many other countries).
  3. The reason we don’t have current account surpluses when we have a balance of goods & services surplus, is due to interest payments on years of collective debt.

Oh how sweet it was in 2004, the transition to a knowledge economy, the sweet illusion. Business had more income form a populace spending more, but without having to pay them more! But then look now, the service business is shrinking, but imported goods grew also.

So if we do not have positive earnings in goods and we are not a service economy either, while the only growth is in debt, then what are we? A broke country!

Now, on a private level what is the affect on people:

Household interest payments as % of disposable income Again 2000 was the turning point, clearly the illusion was no miracle for people. But they felt richer:

Valve of NZ housing stock vs. M3 1979-2007Wow, look at all the generated capital wealth, enough to make one want to go on a spending spree. Looks like one side of a pyramid scheme to me, I think I know what the other side should look like.
If anyone is telling you housing is about to go up again show them this chart, a 50% fall would bring it back into line again, again 2000 was a turning point. So how do we know that borrowed money was mostly non productive? Easy look at this chart:

NZ GDP as percentage of M3

All this extra debt has increased the money supply, but we have not generated more gross domestic product in proportion, the ratio has fallen, and for 25 years in a row.
After the illusionist has left town GDP will fall, all that will remain to be seen will be interest payments showing as outgoings in our national account.

Since 1999, 80 Billion dollars in housing debt has been injected into an economy that only had 100 billion in total money supply at the time, like many countries with a housing boom, it built houses, paid real estate agents, builders, all the services and consumerism around housing… oh yes and taxes for the government. It is clear to me that this boom is a grand illusion, now the party is over, and all we are left with is the bill. Unfortunately we can’t pay it with earnings, we have a bad track record for doing that, but we do have assets to sell. Buying assets made a boom, selling them will make a bust.

So what to do?
This debt money has been misallocated into mostly non productive areas, this nonproductive use of paper money, is making food, energy, and basically everything go up. (Inflation)

In my opinion being cash rich and asset poor has never been a more opposite and better place to be. But why have cash when its value is falling due to inflation and banks are failing, while you could have Silver & Gold, a known safe haven for as long as history has been written.

Well enough for today, if this is the first time someone has highlighted precious metals as investments to you, search the web, there is a wealth of information, just remember don’t buy paper contracts for Sliver or Gold, get the real thing, that’s the whole point, to avoid paper promises, there is an excess of it. Look up Jason Hommel at for more information on that, he explains it better than anyone I know.


Andrew Palmer

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