HOT TOPICS:   Migration  |  KiwiSaver   | Home loans                                                         RESOURCES:    Economic calendar   |   QROPS fees

The comment stream

Reader poll

Join the Interest community to be a registered commenter so you can:
- Edit your comments
- Avoid the CAPTCHA
- Vote on comments
Register Here

Already registered? log back in here ..

Forgotten your password? No problem! Click here

Opinon: Why NZ's rising debt is due to investment, not extra consumption

Posted in News

By Infometrics economist Matt Nolan With New Zealand's net international debt hitting 98% of its annual production (GDP) in March there has been a lot of talk regarding the fact that we seem to have borrowed excessively relative to the rest of the world. As the global economic situation gradually makes it more difficult for a small country like New Zealand to bury ourselves in debt, it is important to look at why we could be borrowing so heavily. Excessive borrowing occurs when households, businesses, and/or government borrow more than is justifiable given a reasonable outlook for future income. Economic theory suggests that there are three main causes of excessive national borrowing:

- Unrealistic expectations regarding future growth in income/production, - A biased assessment of the risks associated with investments/borrowing. - Policy settings that may encourage borrowing or investment in the wrong places. The house price bubble of recent years was a clear example of where New Zealand Inc fell into the first trap. A large number of individuals looked at their house and priced in larger price gains than potential buyers would have anticipated for the given house. As a result of this gap, national wealth was believed to be greater than it really was "“ and households' used some of this illusionary wealth to buy things. However, this gap is relatively small in the grand scheme of things. Recent research regarding this wealth effect (by Calomiris, Longhofer, and Miles) in the United States suggests that there is no direct link between house prices and total household spending "“ and it is likely that a similar result held in the New Zealand case. The more important issue is the issue of risk. New Zealanders are smart people, but the concept of risk and return is not a natural one for the human brain. Systematic biases are rife in the decisions we make, and the way an interest rate is framed (per annum or per week) or whether a deal is made to sound like a loss or a gain can have a significant impact on our actions. However, it is not the individual's difficulty with piecing together disparate bits of financial information that is the issue. The (lack of) transparency in information provided by the finance industry and the incentives provided by government policy are the two areas where individual biases can be transformed into wasteful investment/borrowing. This issue was made abundantly clear by the Morningstar study of global fund managers. In the study New Zealand was given a D- stating that "transparency in prospectuses and reports, investor protection, and taxation were the main areas where New Zealand did not rank well". Fundamentally, they are saying that the structure of our tax system (in terms of investment) and the information given to prospective investors were both not up to scratch compared to international standards. The impact of this failure becomes clear when we look at the Gross Domestic Product (GDP) figures produced by Statistics New Zealand. Over the past eight years the share of GDP spent on consumption by households has stayed close to its average level since 1988. However, spending on gross fixed capital formation (a measure of total investment) has risen well above its 1988-2009 share. Effectively, our rising current account deficit has been the result of greater and greater investment in the New Zealand economy "“ not an unjustifiable thirst for consumption goods. The lack of income growth stemming from this investment suggests that something is amiss "“ even if New Zealand has not really "over-borrowed" in the strictest sense, it appears we may have invested poorly. This misallocation of investment is the unfortunate result of a policy failure, bad luck, and further misinformation regarding the return/risk to investment. Even so New Zealanders may have borrowed for other reasons.  A net debt position of 98% of GDP seems too large to be explained by an understatement of risk, a misallocation of investment, and a belief that house/asset prices would rise into perpetuity. In one sense this is true, even if everyone in New Zealand was in a position where all the risk associated with borrowing was apparent, and where they could foresee what would happen to asset prices in the future, they would have borrowed. But there is nothing wrong with this.  Interest rates have been low, credit has been abundant, and goods have been cheap. Ultimately, this implies that it is not even the fact we have accumulated debt that is of concern for New Zealand; it is what we have done with it.  And in this sense it appears that New Zealand as a whole has made poor investment decisions.  We have collectively whittled away a golden opportunity to improve the New Zealand economy by borrowing to invest in things that offered very little return. Of course, there is always the chance that the return on our investment is yet to come, that within the coming years we will see productivity climb as our prior investments bear fruit.  However, I'm not holding my breath. Please contact Matthew Nolan for further information. We welcome your comments and further insights.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

65 Comments

Matt, Many thanks for this

Matt,
Many thanks for this contrarian view, which contrasts with Rod Oram's view in the SST here http://www.stuff.co.nz/business/2585767/Time-for-drastic-measures

Got a couple of questions.

1. "there is no direct link between house prices and total household spending "“ and it is likely that a similar result held in the New Zealand case." Hasn't the Reserve Bank and others said there is a link? Doesn't this chart showing the divergence between the tradeable and non-tradeable sectors show the consumption part of our economy has grown faster than the productive parts? http://www.interest.co.nz/images/tradables-nontradables-gdp.gif

2. "However, spending on gross fixed capital formation (a measure of total investment) has risen well above its 1988-2009 share. Effectively, our rising current account deficit has been the result of greater and greater investment in the New Zealand economy "“ not an unjustifiable thirst for consumption goods" Isn't some of that gross fixed capital formation investment in housing?

cheers
Bernard

Poor headline to article Matt.

Poor headline to article Matt. Should have read "Why NZs Tsunami of debt is due to stupidity, greed and awful govt, not wise investment"

Wally The headline is mine,

Wally

The headline is mine, but I think it reflected the core of the contrarian argument.
The article is all Matt's

cheers
Bernard

This is fascinating, more please.

This is fascinating, more please.

I am convinced we have not yet got to the bottom of this one but it seems to me we must look at world issues not NZ ones. The house price boom was caused by massive lending by China, Japan and Germany, primarily to the US. We have merely tried to not get run over by the steamroller of international finance.

As you say, borrowing can be good or bad depending what you use it for.

So GDP hasn't really risen

So GDP hasn't really risen materially despite investment in "fixed capital formation" ----> it MUST be unproductive assets.

Matt Nolan quoted only one side of the story on the wealth effect - there is another side (I don't really have time to decide which economists are right):

http://www.calculatedriskblog.com/2009/06/wsj-real-time-economics-housin...

Although I would note that a search for the economists noted in Matt Nolan's article had a view in early 2008 that couldn't be more wrong. Do you really trust their modelling abilities?:

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/03/AR200808...

We conclude that declines in house prices are highly likely to remain small. Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states -- but will not collapse.

We constructed several forecasting models. Even under an extreme worst-case scenario for foreclosures, our conclusion was that U.S. house prices just aren't going to fall by very much in the next two years. In our worst-case scenario, the average cumulative decline is about 5 percent, and only 12 states experience declines greater than 6 percent by the end of 2009.

"Hasn’t the Reserve Bank and

"Hasn't the Reserve Bank and others said there is a link? Doesn't this chart showing the divergence between the tradeable and non-tradeable sectors show the consumption part of our economy has grown faster than the productive parts?"

Indeed - but the link is based on the difference between home owners expectations of future prices and non-home owners expectations, as higher house prices are a "transfer" of resources between these groups, not strict wealth. This has happened, but looking at how nominal consumption has changed suggests that it hasn't been as big an issue as it is sometimes painted as.

Ultimately, if you do a regression (just drawing a line) between consumption and house prices it looks like they run together - but a lot of that is because there are other factors that cause both to happen. After all, the purpose of buying a house is the "consumption" of a housing resource.

The tradeable to non-tradeable divergence is interesting. That is the result of two things:

1) High exchange rate (which is a symptom of other factors),
2) High terms of trade (which allows us more domestic consumption with the same amount of non-tradeable production)

I want to do more analysis of this issue - but I can't seem to find the data for tradeable and non-tradeable GDP :(

"Isn't some of that gross fixed capital formation investment in housing?"

Yes, a lot of it is.

This is where the issue gets very difficult. We have invested heavily in housing, but supposedly we are undersupplied still. As a result, we can't blame housing investment if our CA deficit stays high.

In this case there are a few places where we may be "over-investing" relative to the rate of return, say government infrastructure investment, plant and machinery investment, dairy farm investment. However, pinning down the magnitude of all this would require further digging.

The article is appalling, but

The article is appalling, but does go some way to explaining why our economy is where it is - economists who believe in their own religous theories.

The article is predicated on speculative investment being productive investment, but bidding up the price of an existing productive asset is speculation, not investment.

The purchase of a house to live in is not investment but consumption just as much as the purchase of food or consumer electronics.

Hi IanC, "Matt Nolan quoted

Hi IanC,

"Matt Nolan quoted only one side of the story on the wealth effect - there is another side (I don't really have time to decide which economists are right):"

You are completely right here, the positive wealth effect story has been dominant until very recently.

However, the paper I quoted took the figures from Shiller (who found the positive wealth effect) and corrected for "endogeneity". In essence Shiller has shown the consumption and house prices move together but had not fully shown that house prices cause the rise in consumption.

When correcting for this, to find what causes what, the new study found that any "wealth effect" was tiny. As this is using the same data but better empirical techniques I am more comfortable with their logic - hence why I ended up writing off a lot of the households fault here.

It appears gross fixed capital

It appears gross fixed capital formation also includes renovations. It will certainly include beach houses. Neither of those results in any (material) increase in income.

(edit) Thanks for the reply Matt. Putting it bluntly, I don't trust the skills of those economists (despite their excellent credentials). It is possible they are completely wrong in their adjustments to Shiller's data.

"The article is predicated on

"The article is predicated on speculative investment being productive investment, but bidding up the price of an existing productive asset is speculation, not investment.

The purchase of a house to live in is not investment but consumption just as much as the purchase of food or consumer electronics."

Productive investment is effectively deferred consumption that offers some rate of return to account for the fact that consumption was deferred. A house is still "productive" in the sense that it produces a yield of "somewhere to live" through time.

If your concern is that "house prices were bid up" then this is just a transfer between people inside the country - it isn't increasing NZ Inc's net debt position it is just moving it around. This is concerning from a financial stability point of view, but it is a separate issue.

My article say that it appears we have ended up investing in things that offer too low a rate of return for some reason - and hence our debt position has blown out. It appears to me that you are saying the same sort of thing, aren't you?

"It appears gross fixed capital

"It appears gross fixed capital formation also includes renovations. It will certainly include beach houses. Neither of those results in any (material) increase in income."

Very true. However, they do increase the future consumption value of the property though - and since an investment is something that provides future consumption this fits in nicely.

"(edit) Thanks for the reply Matt. Putting it bluntly, I don't trust the skills of those economists (despite their excellent credentials). It is possible they are completely wrong in their adjustments to Shiller's data."

Fair enough. I do trust this specific analysis - although even I think there is some housing wealth effect (although it occurs through an expectations gap, not prices persee).

Yes - trying to reconcile

Yes - trying to reconcile how it could fit into the statistical information.

For instance, the internal wealth transfer you speak of is clearly resulting in something non-productive being bought/built and our net debt position increasing in some way (eg somehow over-paying for new construction, although land price doesn't appear to be part of GDP). I might have a bit more of a think about it as well. I suspect housing, but can't prove it.

(edit) Oh, and re-reading what you wrote --> a new kitchen and bathroom don't really improve the future consumption value of a property, if that's the part of GDP that this spending falls into.

I agree with Wally. Matt

I agree with Wally. Matt isn't presenting a contrarian view, he is basically saying we spewed truckloads of overseas money on housing, which is an "investment" rather than consumption of plasma TVs & SUVs. RBNZ figures back this up: "By December 2008 the outstanding total debt of households had increased more than six times in dollar terms since 1990. As a percentage of households' disposable income, household debt peaked at over 160% early in 2008, nearing 3 times the December 1990 level."
http://www.rbnz.govt.nz/keygraphs/Fig5.html

Matt isn't suggesting at all that the "investment" has been done wisely: clearly the majority has gone on nonproductive assets, eg housing & land speculation (the latter could be argued as productive, but current evidence is suggesting it was more of an orgy of "investment" into capital gains). Matt suggests this: "We have collectively whittled away a golden opportunity to improve the New Zealand economy by borrowing to invest in things that offered very little return." I actually think it is pretty consistent with Oram's view, & that both are contrarian to the Tony Alexanders etc of this world.

"Oh, and re-reading what you

"Oh, and re-reading what you wrote "“> a new kitchen and bathroom don't really improve the future consumption value of a property, if that's the part of GDP that this spending falls into."

True. This is a mis-measurement on the part of GDP though - as durable goods do give a flow of consumption value through time. GDP is a damn annoying measure for social welfare.

oh, careful, PeterR. To the

oh, careful, PeterR. To the extent that houses Are places of business (and from where I sit I can count three immediate neighbours as well as myself), they Do have a productive aspect. Not 100%, to be sure. But not 0%, either.

Don't over-generalise....

Dear oh bleeding dear. Can

Dear oh bleeding dear. Can somebody tell me what the heck the argument is all about?
I'm getting my investments confused with my consumption and the whole lot is one big porridge of credit.

I had read some time

I had read some time ago, I think in the Economist, that the wealth effect was estimated at about 3-5% of the increase in housing value, or thereabouts. Which didn't sound that enormous. But I think that maybe there was more than the wealth effect on consumption at work - the "rise" in value (or perception of it) encouraged people to forget about long-term saving, & become compacent about their financial stability etc.

Hi Philly, "I actually think

Hi Philly,

"I actually think it is pretty consistent with Oram's view"

In some sense that is true. I think our primary difference lies with our view of households. I don't think that households need to return to a net positive savings rate, he does. I think to some degree he believes there has been overconsumption - however, with China keeping their exchange rate low I don't think this is necessarily the case.

"the "rise" in value (or perception of it) encouraged people to forget about long-term saving, & become compacent about their financial stability etc."

Definitely - it gives people retirement money. However, people without houses have to pay more to get "future housing consumption" when house prices rise - this implies that these people are forced to save more. In net terms it should mostly balance out.

Matt: Does this mean you

Matt: Does this mean you are of the "housing has plateaued and from here on in will stay reasonably static, the wealth gain is real" brigade, rather than the "housing is going to crash & burn & destroy the housing wealth that people believe they have gained" doomsayers?

Thanks for your replies

"Does this mean you are

"Does this mean you are of the "housing has plateaued and from here on in will stay reasonably static, the wealth gain is real" brigade, rather than the "housing is going to crash & burn & destroy the housing wealth that people believe they have gained" doomsayers?"

For me what matters is two-fold:

1) How quickly do house prices adjust,
2) How do expectations of house prices change.

A sharp adjustment in house prices is a pain, for financial stability reasons - this is what the US has experienced. Fortunately (I guess) it appears that the drop will take a little longer, allowing banks (and households) to adjust balance sheets. However, in net debt terms for the whole economy I am not sure that the house price adjustment means much.

The expectations of house prices between owners and non-owners is the main issue for debt accumulation. I am hoping that recent events has moved these views closer together - but we will see.

My outlook for the housing market will no doubt be completely wrong - so I will avoid saying much more than I expect house price growth to return by the end of the year, mainly as the result of the crazy low level of building (and the fact that I hear our housing stock is running low).

Thanks Matt. Earlier you say,

Thanks Matt. Earlier you say, "If your concern is that "house prices were bid up" then this is just a transfer between people INSIDE the country - it isn't increasing NZ Inc's net debt position it is just moving it around" (emphasis mine). Surely this isn't true - the money to bid up the prices was largely borrowed from overseas (about 40% of overall bank lending), & that has enormous long-term ramifications to our investment deficit and hence current account deficit, & of course to the 100% of net debt relative to GDP that we now have?

"Surely this isn’t true -

"Surely this isn't true - the money to bid up the prices was largely borrowed from overseas"

But if it is NZ1 buying a house off NZ2 then it doesn't matter if NZ1 borrows $1 or $100bn to buy the house off NZ2 in terms of the net debt position - as one person borrows the money and the other person receives it.

That is why it is definitely a financial stability issue - it exposes part of the country to foreign lending markets and the such. However, in terms of net debt it is not.

Isn't the real problem one

Isn't the real problem one of too many people paying too much with other peoples money for property, expecting others to repeat the stupidity using even more cheap credit made available by the banks with the full encouragement of the RBNZ and the govt. And is it not true that the cost of the credit is set to rise and rise driving more and more people into the loss of whatever savings they had to begin with. Is it not now obvious that the govt is unwilling to bring this fraud, this stupidity to an end?
Must we sit back and watch the bubble expand until some overseas investor finally realises this country is one bloody big economic bomb. That's what I see happening.

"Effectively, our rising current account

"Effectively, our rising current account deficit has been the result of greater and greater investment in the New Zealand economy "“ not an unjustifiable thirst for consumption goods."

I agree, to an extent, data shows our personal debt isnt that bad, corporate debt though looks really bad though.

"The lack of income growth stemming from this investment suggests that something is amiss"

I agree...really amiss.....is there something "hidden" here?

So, Q, is this real investment or is it a way to make excessive short term profits by taking out huge debt and then paying out dividends?

I dont believe NZer employers / business owners are that poor at borrowing to expand and then not getting that return. I think the problem is elsewhere. Since many of our bigger companies are foreign owned or owned by shell companies I wonder if this problem is,

1) one of "wide boys" coming in, buying up an asset with low debt, ramping up the debt to reap a fast reward and then moving on...?
2) Or CEO's trying to prop up the share value by trading debt for dividends? so they get high bonuses?

We seem to be in a situation where the top players can reap huge rewards in the short term with no checks and balances.....the dire predicament of the global finance market shows this can happen all to easily.

I dont see smaller companies doing this. But reading what happened to the likes of Repco, has made me wonder for a while just what is happening.....the graphs and this article just seem one more piece in the puzzle for me....it just does not add up....I suspect good and sound NZ companies are being gutted by 3rd parties....and thats biting us.

regards

"Isn’t the real problem one

"Isn't the real problem one of too many people paying too much with other peoples money for property, expecting others to repeat the stupidity using even more cheap credit"

That is indeed a financial stability issue which the RBNZ ensures us is not too much of a problem in NZ at the moment.

However, that is not the issue that the article is focused on (which is what is driving our large net debt).

Both these issues are important - however, at the present time it appears that the net debt position is more of a concern than the distribution issue (of who is holding the debt). Hence why I'm focusing on it here.

OK, Matt, now it appears

OK, Matt, now it appears that dairy farm prices may have gone down about 25% (ok, I know imperfect stats, but lets assume it). Cocky1, who bought at inflated values, now sells to Cocky2 at a firesale price, as he is in the financial poo. But the debt is still there. He is now a lot poorer (since the farm he bought for $4m is now worth $3m) & the $$ borrowed from overseas is still a millstone & has to be repaid. That is, the bubble was ephemeral but the debt was real.

Hi Steven, The real kicker

Hi Steven,

The real kicker for me is the actual international flow figures - there does appear to be gaps in what we have recorded. This large net debt position is actually a very large and complicated puzzle that involves more than just "household debt". Interesting stuff.

"OK, Matt, now it appears

"OK, Matt, now it appears that dairy farm prices may have gone down about 25% (ok, I know imperfect stats, but lets assume it). Cocky1, who bought at inflated values, now sells to Cocky2 at a firesale price, as he is in the financial poo. But the debt is still there. He is now a lot poorer (since the farm he bought for $4m is now worth $3m) & the $$ borrowed from overseas is still a millstone & has to be repaid. That is, the bubble was ephemeral but the debt was real."

But initially Cocky1 paid Cocky0 $4m - that was the other side of the debt. And Cocky2 probably borrowed the $3m himself - so we have the following:

Cocky1 has $4m in assets
Cocky2 has $1m in liabilities
Cocky3 has $3m of debt, but a farm worth $3m.

So if there had been no transactions there would be the farm. Even after the three swap in net terms there is still only a farm - however, Cocky Inc (all three of them) both owes $4m and has $4m, which is net $0m

It seems 40% of Kiwis

It seems 40% of Kiwis work hard producing/ manufacturing/ servicing and 60% play monopoly with dices provided by finance companies on a 1.8m high table build by the real estate industry. Well - what an economy !

Bollard said... "The recovery will

Bollard said...
"The recovery will be an opportunity to encourage greater savings among households and more investment to bolster exports,
A risk to the pace and balance of the recovery is that households will resume their "borrow-and-spend" habits before they have paid down debt,
"This could be triggered by renewed moderate house-price inflation and needs to be avoided," he said. "Reliance on past experience of strong house-price inflation and easy credit will be untenable."

And so with this latest jawboning effort the Gov of the RBNZ tossed the 'untenable' hot spud to Mr English who slapped it across to his mate John and it bounced off the pm's table into the rubbish bin. Well left John!

What will we hear in the next episode of "The hot Spud"?
Who will enter the PMs office to rescue "The Hot Spud" from the rubbish bin?
Tune in at the same time next week for yet more jawbone rattling tales on this exciting story about the 'untenable Hot Spud'

"It seems 40% of Kiwis

"It seems 40% of Kiwis work hard producing/ manufacturing/ servicing and 60% play monopoly with dices provided by finance companies on a 1.8m high table build by the real estate industry. Well - what an economy !" W.Kunz

And isn't that what our problem is?

Just look at the fees earned by the lawyers, accountants, advisers, real estate agents and bankers every time there is a property transaction. And let's not forget the ongoing bureaucratic costs of central and local government.

That is where any productivity gains disappear too.

Sally you are great -

Sally you are great - at least one person aggrees, thank you soo much.

Wow this certainly has warmed

Wow this certainly has warmed things up. A whole new dimension to the NZ inc saga.

I like the idea there may be a ponzi scheme lurking somewhere as referred to above . Isn't there a net flow of interest and dividends overseas and is that where the problem lies.

This is exercising parts of the brain that are very rusty!

In essence the question seems

In essence the question seems to be what have we spent the money we have borrowed on exactly?

I can think of a few windmills, a bit of oil and gas development and Formica, perhaps a bit of milking equipment, but is that all?

Sally---You forgot to mention the

Sally---You forgot to mention the economists and probably some other parasites as well.

Matt Nolan: very interesting...it has

Matt Nolan: very interesting...it has some bad looking impacts for us....in the good times we have over-leveraged, come the bad we are stuck?

Since I read what happened to Repco I have wondered what's going on....Repco isnt unique...there seem to be a disturbing amount of large NZ companies with huge gearing yet producing nothing from that. The graphs then added to that concern., ie huge corporate debt. Also our producivity is bad, and we are told that NZ companies need to invest in productivity tools, they are clearly taking on debt and investing in something/somewhere, it all seems to be debt driven and yet not producing any gains....so where is it going? Is NZ acting as a conduit for ppl overseas to bring overseas debt into NZ, and then ship it out as a profit and do a runner?

I listen to Peter Shiff talking about NZ companies having a high dividend payout and being very attractive....yet we are not productive...so how is this dividend justified?

NZ has had a high interest rate, attracting the "Japanese housewife" has her money been used in this debt "scam"? if so, what's the potential impact on NZ? Will quite a few of our companies default? Are our pensioners who have now been burned in the finance sector debacle and rushed into corporate bonds about to get thier finances decimated a second time?

This is giving me a bad itch and its getting bigger.....I dont seem able to scratch it...it could be that I simply dont understand or I am missing info....

regards

Wally: “This could be triggered

Wally: "This could be triggered by renewed moderate house-price inflation and needs to be avoided," he said. "Reliance on past experience of strong house-price inflation and easy credit will be untenable."

reads to me like high and fast OCR hikes...

regards

Thing

Matt - "The (lack of)

Matt - "The (lack of) transparency in information provided by the finance industry and the incentives provided by government policy are the two areas where individual biases can be transformed into wasteful investment/borrowing."

Regarding "incentives provided by government policy", what do you think needs to change? (Anyone else?)

Cheers, Les.

Les, The incentives are simple,

Les,

The incentives are simple, the removal/reduction of taxation of investment earnings and interest on deposits. Combined with the introductions of a combination of land taxes and capital gains.

However the sensible course is not the politicly expedient one, so expect more idle hand ringing from Wellington.

Gunther, income is income so

Gunther, income is income so gets taxed....not everyone has land or capital so raising GST instead, maybe.

As for "sensible" I dont agree....often "sensible" is another word for hey this benefits me so its "sensible"

Deposits, these can be taxed, its income, clearly, there is no incentive here its a safe income...no risk, no directly investing in say shares of a company.

Investments is a very vague statement....hedge funds are investmants, commodity speculation are investmants. Considering its doubtful that these are positive for society as a whole, Id actually 80% tax these myself....they are not productive, they may even cause severe impacts on the developing world....

So neither of these broad terms is proven to be sensible, just biased. So please prove/justify why its sensible for NZ, until then it is not.

Mat Nolan. <blockquote> Productive investment

Mat Nolan.

Productive investment is effectively deferred consumption that offers some rate of return to account for the fact that consumption was deferred. A house is still "productive" in the sense that it produces a yield of "somewhere to live" through time.

An investment is something that produces more than it consumes. A place to live is always consumption albeit sometimes offset by productive aspects such as running a business from it.

My article say that it appears we have ended up investing in things that offer too low a rate of return for some reason - and hence our debt position has blown out. It appears to me that you are saying the same sort of thing, aren't you?

I think we agree on NZ making very poor investments but I would use the term speculation or consumption except where the expenditure was returning a profit after servicing debt. In the latter case debt would not be blowing out.

Peter - in Matt's defence

Peter - in Matt's defence the issue is around what the stats are saying.

Gross fixed capital formation is building new housing (excl land), renovations, and then all the other non-residential things you'd expect. The GDP stats tell us we have been proportionally spending a lot on these items ("investing") for very little additional GDP benefit. It's important to note that it doesn't include transacting existing property or and land (except to the extent the fees and costs of that are included).

So that excludes the obvious - that its spending on residential (or other) existing property. Its hard to argue we've overbuilt new property (as Matt says - we don't seem to have a surplus), so the options for unproductive spending on gross fixed capital formation are limited:

- a hell of a lot of needless renovations
- the new houses that have been built have been built at a cost well above their "productive" capacity (I believe this comes into GDP as imputed rents)
- unproductive infrastructure investment?
- excess capacity in businesses (little evidence of this until manufacturing collapsed)
- businesses paying too much for capacity (note - this is what the stats indicate as the major driver of the increase, possibly exchange rate and commodity price driven)
- "intangibles" - which I can only assume looking at the info on gross fixed capital formation is oil and gas exploration
- something else unproductive

It's... confusing.

Steven, I'm not an economist,

Steven,

I'm not an economist, just a humble IT engineer, so maybe I see thing in black and white to often.

But the way I see it, we need to stop taking of excessive debt to purchase unproductive assets (housing & dairy farms) expecting capital gains, as these 'investments' are essentially leveraged capital gains speculation.

But you can either offer incentives to save, either through tax breaks or better returns, or you can legislate saving, through compulsory schemes.

And by saving I mean any productive investment anything that prevents interest going overseas if preferable that the status quo. Of course the types of investment the receive tax incentives if any will need to be careful vetted. No one want's the tax payer subsidising speculators.

Remember the perceived better returns from property speculation over other investments is one of the major reasons people in New Zealand turned to property. So you need to make the alternatives better in the minds of the public again.

Q: Who/what is taking on

Q: Who/what is taking on the debt? do we have that info? What % is the banks? I then assume thats going into housing, loans and credit cards....is it 20% of the "company" debt? 50%? 80?%. Say its 50% the rest is still a big number...thats a lot of money where is the return? it should be showing up...If most of the debt is the banks, then oops....has commercial (retail) property gone potty? then oops....our manufacturing has been in decline, so they cant be taking on this debt? Retailers? dont they tend to lease?

Would some indicators would be the recent spate of companies issuing large sums of bonds? so why do they / did they deserve to pay out dividends in the last few years? These are the captains of industry that the loony right are telling us are worth their high wages and bonuses? like huh?

regards

Gunther: So am I..(just a

Gunther: So am I..(just a humble IT engineer)

Second para: Looks like it.

Investment and savings, yes we need it, but there is good investment and good savings ie something that benefits more than just the investor....eg expands a company so more jobs, more company profit, more tax income for Govn...especially for exporting companies....this to me is good investment....Some investors however put money into hedge funds to speculate, these can make 20~30~50% return for them, but the problem is it can hurt people, companies and even countries. Take the last oil peak price event (at $147USD) that caused starvation is some countries and plunged us into a global recession....clearly it was a good investment for the speculators and a bad one for everyone else....

"Remember the perceived better returns from property speculation" or is it the perceived less risk? One way to clean that up is to get our financial reporting squeaky clean, as a recent report said that we got a -D for it. Certainly I think small "mom and pop" investors have been burned and the way things are going, will be burned more....I think the recent corporate bond bandwagon could be ikky....right after the finance companies fiasco and they were dodgy....

regards

IanC. In terms of "

IanC.

In terms of " something else unproductive":
1. Dairy conversions. Many of these are not viable, and some will be converted back. Pines to dairy, possibly back to pines. Sounds much like horticulture chasing the need boom. You see it all: Sheep to grapes, dairy to apples, grapes to stonefruit.
2. Increasing dairy production intensity. Much of this is marginal revenue negative.

Then confuse both dairy conversions and development with setting up equity partnerships. Where does that fit?

Isn't wasteful/non-performing/inefficient investment in effect

Isn't wasteful/non-performing/inefficient investment in effect just a form of consumption?

who what took on the

who what took on the debt?

At the instigation of home renovator TV shows the nation upgraded its housing stock. Better kitchens and bathrooms can increase the health and productivity of wage and salary earners.

SME owners borrow against property to provide working capital, expansion funds and tax payments. These loans are recorded as housing mortgages but may have been productive investment.

Chunks of more recent borrowing will have been for mortgage break fees. Is there an offsetting NZ asset in this transaction?

- something else unproductive It’s…

- something else unproductive

It's"¦ confusing.

migrants getting subsidised infrastructure which feeds into the property market fuelling debt accumulation?

I wonder what role the tourist industry plays? A lot of businesses seem marginal due to heavy competition and a lot of money goes back to suppliers.

JH: "A lot of businesses

JH: "A lot of businesses seem marginal due to heavy competition and a lot of money goes back to suppliers."

I think there is quite a bit of truth in that....NZ is a small market and at the importing level, brand owners seem to be able to keep/demand high margins, the retailers seem to list "recommended prices" and nothing else.....when you see what an American would pay for a TV v a NZer you have to wonder...

Components seem also to "demand" high margins for known brands....I recently did some research into 120mm computer fans....surprise surprise all made in china..."no name" $20, named eg coolmaster $32....gigabyte....same fan made by same chinese company.

Cases, I bought a gigabyte case, a fellow co-worker bought a Coolmaster, underneath an identical case chassis....sides, identical (which was how we initially spotted it)....the plastic front and badge the only diference...mine was cheaper....by $30....

I bought a chinese mobile phone on trademe for $140.... If I shopped in the stores a branded with the same features...$400+ My last phone was $450 off DSE lasted 2 odd years...so $200 a year....if this one lasts a year, Im ahead....kind of a throw away attitude, but buying a brand seems little better....

regards

time to increase interest rates

time to increase interest rates and encourage savings!

I have little time, but

I have little time, but cant wait to get back and get my teeth into this one, an article full of misleading information, the most obvious of which is the net debt to gdp figures offered, they claim net debt only 98% of gdp, this is bunkum, net Dec 2008 was 431 billion 322% of gdp.
The other obvious flaw is what they describe as foreign investment is of course, in-fact, foreign lending, seeking the return of what is loaned plus capital or dividend gain, the international exchange for companies(stockmarket) is dominated by big money inside information that repeatedly sees the pension funds and Mums and Dads, who under the Debt Based Private Monetary System are conned into believing they must invest so what they earned today will have the same purchasing power tomorrow(keep up with inflation), they are repeatedly left hanging on to depreciating freshair as the insiders build bubbles then debunk with the real wealth before the bullshit based bubble collapses. 30 trillion dollars has transferred to their trust funds in the last 18 odd months, roughly 40 years worth of the savings of the basically decent majority of the world. -
http://www.johnpemberton.co.nz/html/debt_graph_info.htm

Also, the serious student of international commerce will want to read the latest from Ellen Brown re the bankruptcy of California and how the solutions sit in the state of North Dakota, one of the few remaining solvent, a state that runs a Debt Free BASED Public Monetary System. You might want to look at her last 20 or so articles, you will learn a lot about what the bureaucracy and bankers in this nation dont want the citizenship to ever learn -
http://www.webofdebt.com/articles/
and these for those who like it plain language all in one place -
http://www.hasslberger.com/economy/money.html
http://www.globalresearch.ca/index.php?context=theme&themeId=2

Iain - wow, just imagine:

Iain - wow, just imagine:

TOWARDS A SOLUTION TO THE DEBT CRISIS IN NEW ZEALAND: THE STATE COULD WALK AWAY AND CREATE ITS OWN CREDIT MACHINE

http://www.webofdebt.com/articles/sunshine_state.php

BUT MR. ENGLISH, YOU CAN CREATE MONEY! JUST FORM YOUR OWN BANK.

http://www.webofdebt.com/articles/but_governor.php

How KIWIBANK, the Nation's Only State-Owned Bank Became the Bane of the 'Big Four' and retained New Zealand's Economic Sovreignty.

http://www.motherjones.com/mojo/2009/03/how-nation%25E2%2580%2599s-only-...

Yeeez Iain, I can't see

Yeeez Iain, I can't see the North Dakota thing catching on in Noddyland, I mean where would all the party political donations come from each election?

So the big question appears

So the big question appears to be how do we encourage get mom & pop investors to put there money into local business. They primarily need a safe investment, on par in the public mind with the safety of property.

So if we inject capital into kiwi bank, allowing them to gain a significant market share and then mandate them to invest into the local economy? Then how do we prevent this being politicised and just become a pork funnel for whoever's the government of the day.

Gunther - we need appropriate

Gunther - we need appropriate regulation in fin. sector so M&D's can invest with more confidence, see:

http://www.interest.co.nz/ratesblog/index.php/2009/06/26/bernard-hickey-...

Then see Number 6 here:

http://www.interest.co.nz/ratesblog/index.php/2009/04/15/opinion-how-tou...

Or variations/expansions of that kind of approach.

Re your response to my question yesterday, agreed.

Cheers, Les.

This has been known in

This has been known in this and many other nations for a long, long time, only it has been suppressed of late. It has already been done in this nation twice in our short history. One early Governor was recalled to England when we were under control of London Colonial Office and the other succumbed to threats of economic sanctions at the hands of international bankers and handed back control to the privates.

The Social Credit movement was seriously dented by Bob Jones and a complicate corporate media in 1987 after they received 21% of vote in 84 election, they hammered Social Credit as the "Funny Money" people. Ridiculing Social Creditors as the nutters that tell people that the banks create money out of nothing then lend it out at interest, when everyone knows that banks only relend their customers deposits.
The evidence to refute this was readily available but a fair chance in the mainstream was not given -
http://socialcreditorbust.blog.co.nz/bob%20jones%20fool%20or%20liar/

Most everyone that frequents this site now knows of the Credit Creation Mechanism that sits at the heart of banking, the role of Bonds, mortgage writing etc and the credit multiplying effect of Fractional Reserve Banking upon internal trading banks.
It would however appear that a large number of our elected representatives, including among the most senior also have not a clue and are completely reliant upon backroom advisers, and have not a clue when those backroom advisers are putting it across them, making them also Fools or Liars, as evidence by this letter of 2003 from Michael Cullen to a Democrats for Social Credit member -
Even more intriguing, consider the following example of a pronouncement on this subject by the current Minister of Finance: In a letter dated 16.5.03 sent to Mr. Jeremy Woodhall of Onerahi, Whangarei, Michael Cullen made the following statement; "I can assure you that banks are required to be registered by the Reserve Bank and their books have to balance. In particular, banks do not create credit like a central bank. When banks make loans they are lending the money creditors have deposited with them".
That sounds reasonable and indeed, it reflects the widespread public belief that banks only lend what is deposited with them.
However, contrast this with the Reserve Bank's Bulletin 71, No. 1, March 2008 which states;
"As this process continues, the ultimate outcome is that the initial $1,000 in deposits can be used to create new deposits (money) and credit (loans) to the value of $9,000. This new money is generally termed 'inside' money to reflect that it has been generated by the private bank 'inside' this economy."

I know John Key, advisor to US Fed 1999-2001 is in the "game", also thought, until recently, Bill English was to, but having observed his recent performance I am beginning to think that Bill is just another muppet having the wool pulled over his eyes, probably thinks that Bonds are actually swapped in exchange for someones real savings somewhere.

So I have just read

So I have just read some of the comments above..... But no one seems to know where we are headed i.e. economy? Are we all doomed?? Is business and housing doomed?

It's a laugh isn't it

It's a laugh isn't it Newby? Like being in a jet at 40 thousand feet with the wings falling off and the pilot telling the passengers "not to worry because he has a plan and does anyone have a spare tube of superglue"! That's where we are at in Noddyland. From here it's a steep fall which won't hurt too much until .....

Fall Rise what ever I

Fall Rise what ever I just wish it would hurry up and happen! So we can all get on with our lives, and your right get out of Noddyland. Our Government just needs to sit on there hands and let what has been done be undone and stop interferring in the correction..........

Usually debts increases due to

Usually debts increases due to expenditure.But i cannot find answer why it increases due to investment.somebody please tell me...

To see information about this

To see information about this post, the students purchase essays or custom essay at the writing service. Some papers writing services render the essay writing about this topic.

That’s obviously that essay writing

That's obviously that essay writing service should give the ideas referring to dissertation thus, people will very easily order essays or thesis service about this good post

To be successful means to

To be successful means to have the high grades and for that, students must demonstrate the high quality essay paper. But is it available to accomplish it not using a support of the news writing service? Yes, that’s real, but it will be more simple to buy do my paper essay just about this good topic in web.

<a href="http://www.customessaymeister.com/?mode=search&counter=1&query=All+Quiet+On+The+Western+Front&submit_search=Go!&submit_search=Search">All Quiet On The Western Front</a>  |  <a href="http://www.customessaymeister.com/?mode=search&counter=1&query=1984&submit_search=Go!&submit_search=Search">1984</a>

To be successful means to

To be successful means to have the high grades and for that, students must demonstrate the high quality essay paper. But is it available to accomplish it not using a support of the news writing service? Yes, that’s real, but it will be more simple to buy do my paper essay just about this good topic in web. All Quiet On The Western Front | 1984