Thursday, September 22, 2011

How is Little Old New Zealand Going?

The latest figures measuring New Zealand's external assets (stuff we own) and liabilities (stuff we owe) are in from the New Zealand government statistician.

It shows the nation's external liabilities exceeded assets by $140.2 billion at June 30, amounting to 70% of GDP. The nation's international financial liabilities edged up to $253.9 billion.

What are we to make of this? How is little old New Zealand going?

As at June 30, 2011:

International Assets = $113 billion
International Liabilities = $253 billion

Net International liabilities = $140 billion (or 70% GDP)

Therefore, if we put 70% of the production in all goods and services for one year (GDP) plus sold and added to this all the assets we have internationally, we would be able to pay off our debt. Cool.

But wait. This is like having a house worth $100,000 as your only asset. But you owe on this, and other things, $223,000. But we earn $176,000 per year. So to get rid of our debt we could sell the house and put 70% ($123,000) of our next years paychecks toward the debt. Doesn't look so good.

Economist Rogoff tells us what happens when a 90% debt-to-GDP ration strikes. Negative growth in GDP. That is, the debt consumes more wealth than a country is able to produce and unless that debt is redupiated, the life-blood of that economy is sucked out.

I heard an Emiretus Professor at MIT (and Nobel prize winner) say on National Radio this morning, that a 70% debt-to-GDP is of no concern. I know he's far more educated than I will ever be in economics, but I would worry if my household debt looked like that. Wouldn't you?

So don't be alarmed, normal debt service (or servicing) will resume.

Also out today, economic activity, as measured by gross domestic product (GDP), was up 0.1 percent in the June 2011 quarter. Could this be a slightly manipulated figure? This is so negligibly positive it warrants suspicion. Remember, a positive figure gets us out of having to admit that we are in recession. Funny that...

And this from Dan Norcini yesterday before the Fed's announcement:
"Commodities are still poised to run from here, stoking inflation, although everything hinges on what the Fed and ECB do next. 
The entire world awaits the Fed's pronouncements on Wednesday September 21st. Will they announce just a little more thin-air money to be injected into the system or a lot? Or maybe none at all?
To those of us watching all this unfold, it's every bit as surreal as it appears. How can it be that we've gotten to the point that trillions upon trillions of global paper assets are poised to inflect upwards or downwards depending on whether seven people currently seated around a board room table decide to manufacture infinitely leverageable 'wealth' out of thin air now or wait another six weeks before doing it? 
That true wealth cannot be manufactured out of thin air seems lost on quite a few market participants, who are more than happy to continue trading stocks and bonds back and forth for as long as the music continues to play. What their exit strategy is for when the music stops is open to question but in many cases it will be a forlorn hope such as "I'll get (my clients) out in time!" 
More on the Federal Reserve's pronouncements tomorrow.

Gold in New Zealand dollars: $2224.16 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $49.34 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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

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