Tuesday, April 5, 2011

What is the Plan?

New Zealand finds itself in a precarious position with its finances.

We are spending too much for the income we are producing. We are heavily in debt.

Privately, we all borrowed from the future to pay for things now, like houses and cars. The house was our ATM. Just go to the bank and get more cash ‘on the house’.

Publicly the government joined in the good times and increased the size of the public sector and embarked on paying for large infrastructure schemes.

It may be that ordinary NZers, living with their ordinary pay packets, are beginning to wise up to their own large debt issues. Their discretionary spending is drying up and even their core spending on basics like food and petrol is taking a hit. All to pay down debt and to survive week by week. Most NZers wouldn’t have more than a week of savings to live on if they lost their jobs. And that’s probably being optimistic.

But what about our government? There is talk of austerity supreme in the budget in May. This is good is in some senses, but with the way the system works now, it may have serious repercussions.

If the government cut spending on social welfare, then lookout for growing social unrest. If they cut too many jobs in the public sector, then these people will find it difficult to get jobs and the effects will be seen on the government’s bottom line.

There are no easy answers for NZ. We can’t print money (QE), like the Europeans or the Federal Reserve Bank can, to cover our new government debt and to re-finance the old debt rolling over. We have to sell our bonds to people who love us! The Chinese, the Europeans, and large private funds.

But the world is changing fast. Japan won’t be buying. To the contrary, they will be selling their US Bonds, and other assets, to pay for rebuilding. The Chinese may come to the rescue with their US dollar cash, but do we want more Chinese ownership? Who’s going to buy our debt? Is the last resort to default? This would be calamitous. Watch the NZ dollar tank in that scenario.

Maybe there is time for us to grow our way out of this. To repay debt and cover interest payments. We are a country rich in agricultural resources and brain-power and also mineral resources. The time to harvest fossil fuels is not yet over. We have good educational standards and great intellectual capital. But time is short.

With $350 million  per week borrowing and growing., there are no easy quick-fix plans.

But what is the plan? Do you have any ideas?

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