If it doesn’t make the boat go faster…..


That was the famous line used by team New Zealand while preparing for the Americas Cup, a team very focused on a single objective.

Before they did any activity they would ask the question “Will it make the boat go faster?” If not then it was not done, as it would have been a wasted effort, that same effort / resource could be used somewhere else where it could “make the boat go faster”

So if there was one single metric to concentrate on in New Zealand (or for that matter other “Western” indebted countries) to get us out of the current economic mess, what would it be? What would be making the boat go faster in economic terms?

Would it be GDP? (Gross Domestic Product) that is the metric a group of 100 entrepreneurs picked out to concentrate on when they gather to “brain storm”. (See details here)

These entrepreneur’s have the aim of doubling New Zealand’s GDP, well that sounds good right? To me it does not sound right, not because of what they are trying to do but because GDP is a bad measurement for an economy, especially an indebted economy. GDP has doubled in the past many times but we are still in debt, yes GDP has its uses but to put it into sailing terms its like saying “does it make the boat look prettier?” now looking nice might make you feel better but it would not help you win a boat race.

I believe many people do not know that GDP includes borrowed money, as a guess I would say 99% of the population would not know that or at least think about it. Is that important? Yes very, consider this, New Zealanders borrowed into the country 90 billion dollars during the 7 year housing boom, our total money supply is only about 200 Billion, we only have 4 million people. That is a staggering amount as a percentage over that short time span.

That 90 billion (debt) has gone out into the economy and been spent (GDP).
So I now ask the readers here, is GDP a good measurement of success? One way to double GDP would be to double borrowing! People should also understand that when borrowing drops in a country with current account deficits it would be no surprise that GDP would fall and assets must be sold to pay interest.

It is now clear to many that the housing boom is over, but many still don’t understand the root cause. People became saturated with debt, every new loan on the whole gives the economy less of a kick, like a drinker getting closer to becoming an alcoholic, it takes more alcohol to get the kick. In economics it is the effect of interest payments on past loans dragging everything down, once interest payments overcome the rate of borrowing its “all over rover”, the debt pyramid falls over.

The news media reported it as a complete surprise that GDP had fallen so sharply, “how did this happen” and “what a surprise!” The government surplus turned into debts almost overnight.
This was very predictable, this qoute is from my article posted June 08 called "The grand illusion" - "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."
GDP was driven by borrowing not useful productivity, governments were funded by tax intake from the billions of borrowed dollars changing hands in the system, politicians would say how well they ran the country, with bread for all and circuses too!

But Oh what a surprise! It all falls over when people stop borrowing, it was predictable.
This is why governments are keen to get borrowing going again. For a while they wanted people to slow down on the borrowing, but not now, Oh what they wouldn’t give to see the dead horse called consumer whipped back into the shopping mall! They say to themselves “oh darn it all, if the horse would just last one more term, Oh not on my shift please! Turn the printing press on and stuff paper into the carcass, maybe no one will notice its dead!"

Cue the theme song

Ok back on subject -So what would be the metric to use? It would be the “current account”
The current account takes into account all the countries incomings and out goings. Just like households or business accounts should. While GDP would be like measuring the amount spent in a household or the turnover of a business with out considering the bank balance or profit! That would be a terrible measurement.

The current account can be negative even when we are in trade surplus, being in trade surplus is like a household that spends less on food and other expenses than it earns, but when taking into account interest on the mortgage it is going further into debt, that is what the current account measurement means for our country.

Shockingly New Zealand has not had a current account surplus since 1973!

(click image to enlarge)
All those years of accumulated debt have not gone away, they are building strongly just waiting for us to find them, like a used nappy that rolls under a car seat it will have to be dealt with. Even on the occasions when NZ does have a trade surplus we still stink in current account terms, still going backward due to the interest on all those years of accumulated debt, the stink won't go away untill we deal with the real problem.

In summary there is only one real way to get out of this mess and that is to get our current account back in positive for many years, that means working hard and not borrowing for years!

Now I’m sure that this idea will be dismissed by the mainstream on the grounds of being too depressing, but this is reality (Not like reality shows, real reality!).

I hope we can stop fooling our selves as a country, it’s a real shame we have got ourselves into this mess by choice, one problem is I don’t think most people have any idea about how money works so they leave it up to the people in power and just say “give me more” i.e. bread and circuses at the same time. I don’t blame politicians because they are giving people what they ask for, so the population needs to wise up, or we will be peasants in our own land working for the people who gave us plenty of rope to hang ouselves with. We could end up with no way to get out of debt as our creditors will own the productive assets in our country (ie: as happened in Argentina) In this regard the worst thing governments can do now is bail out and consolidate debt where it can be targeted by foreign creditors who can then demand the sale of productive assets.

Yours faithfully


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