Monday, August 8, 2011

In Good Shape

Listening to the Prime Minister of New Zealand, one could be forgiven to thinking he was grasping at straws.

This morning he reiterated the old lines of 'our debt is only 30% of GDP' and 'our banks have better capital ratios now as compared to the last global financial crises' and, last but not least, 'we have borrowed more than we need in order to take advantage of lower interest rates and the higher dollar'.

While this last point is correct, in that borrowing in an era when our dollar is higher against the US dollar makes our borrowing cheaper, it really is like saying the gun is to our head, but it's only got two bullets now, when it use to have one. We still have a decent chance of survival.

But borrowing more than we need? Are not these the leaders of our country? Imagine if you wanted to buy a car and needed to put the house up for collateral. You need $10K for the car and you borrow $12K. Why on earth would you do this when you would be paying back more than you need to 'just in case' you need cheap money later?

Where, even, would you park this extra cash? In a bank? No, if you are a large holder of cash, like a Government, banks don't want your money. The would charge you to have it sitting there. You see, they can't use it, no one wants to borrow. So the only alternative for large tranches of cash is...wait for it...US Treasuries. Where do we sign!

New Zealand is not in good shape, despite the confidence spruiking from our leaders. Add in private sector debt and our debt to GDP ratio goes up to nearly 90%.

They know, without a doubt, that the extra money they are borrowing will only buy us time when this current financial system goes pear-shaped.

Perhaps the extra borrowing will enable social welfare spending to keep going a little longer. Important to keep the people happy and to stop potential unrest in the streets. Lord help us if the people get wind that there is no money left. It would make Upper Tottenham Road look like a picnic scene from a van Gogh painting.

On another note, how will the markets fare today, and tonight, after the US debt downgrade? Will precious metals go higher as risk trades go off the table? Will the US dollar rise, as equity markets tank? The only sure thing is that markets this week could bring new meaning to the word 'volatile'.

Gold in New Zealand dollars: $1980.243 per oz
Previous all time high: $1994.70 per oz

Silver in New Zealand dollars: $45.62 per oz
Previous all time high: $59.19
per oz

The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001

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