By Bernard Hickey
Silvio Berlusconi looks a bit like a bullfrog, and this week he became the biggest boiled frog in the history of financial markets.
The parable of the boiled frog is that a frog in a pot of water will not jump out to save himself unless he jumps in and it is already boiling. If the water starts cold and then slowly warms up to a boil then the frog will lulled into a false sense of security. By the time he realises he is in trouble, it is too late and he is boiled alive.
This week Silvio Berlusconi was boiled alive by the bond markets. It's a salutary lesson we should all watch closely, particularly as we prepare to vote in a fortnight.
In years to come, the global economy, businesses and anyone with debt will look back on the surge in Italian bond yields to unsustainable levels on Wednesday night as Europe's Lehman moment. That first Lehman moment on September 15 2008 unleashed a near collapse of America's financial system and triggered a global economic downturn that many believe we have not really emerged from.
Europe's Lehman moment may well destroy the Euro and cripple Europe's economy for years to come. That will cascade through China and Australia to us.
It didn't have to be this way. Silvio Berlusconi should have realised a long time ago he was in hot water.
Berlusconi and Italy have been warned for years that the third largest economy in Europe was saddled with too much debt. It has over 1.8 trillion euros (NZ$3.1 trillion) of government debt, which equates to about 120% of GDP. Despite more than decade of Berlusconi governments and promises of reform, Italy's economy remains hide-bound in corruption, nepotism, a lack of productivity growth and growing youth unemployment.
Berlusconi and Italy were allowed to ignore these warnings for so long because of the soothing feel of low interest rates. Italy's decision to join the euro meant it got access to the low interest rates that Germany had. It's amazing how much debt you can sustain when you have low interest rates. The temperature of Berlusconi's water was the low interest rates on its debt.
Everything seemed fine as long as those interest rates remained low, as they did for 11 years.
Years of warnings were issued. Summits were held. Threats were made. Protests were lodged. Yet Berlusconi was able to brush aside those warnings by pointing to those low interest rates.
Sound familiar?
Both John Key and Phil Goff are also brushing aside warnings about taking on more debt by pointing to our low interest rates. What's the problem, they say, when New Zealand can borrow for terms of 10 years or longer at 4%. All this talk of credit rating downgrades and higher borrowing costs failed to eventuate, they say.
Many homeowners and investors are doing the same. What's wrong with taking on more debt to buy a more expensive house when you can borrow at 5.6% and it seems like interest rates will stay low for ever, they say.
Key, Goff and anyone with too much debt should be very careful when they rely on low interest rates forever.
At some stage the bond market vigilantes will turn on us with their pitchforks and burning torches, just as they did with Greece, Portugal, Italy and Spain, unless we get our foreign debt under control and start saving more as a nation. That means running budget surpluses and current account surpluses. Neither are remotely in prospect under the current policies proposed by both sides of politics.
We don't know when the bond markets will turn. But when they do it will be too late. We'll be too cooked to jump out of the pot.
John Key and Phil Goff should try to avoid repeating Silvio Berlusconi's mistakes and avoid becoming the boiled frogs of the South Pacific.
See our interactive chart of NZ government debt below.
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40 Comments
Of all people, John Key must realise what vigilantes of any financial sort can do to a small, vulnerable economy. After all back in the 80's, he helped Andy Krieger, of Bankers Trust ( where Key later worked) attack the ...New Zealand dollar, and hence the economy..., when he saw our economy was unsustainable, with a set of national accounts in such a state. ( this was no small scale or normal speculation; it was a co-ordinated, massive attack) They attacked it; prospered and forced the RBNZ into panicked moves to calm the situation.
That means running budget surpluses and current account surpluses. Neither are remotely in prospect under the current policies proposed by both sides of politics.
That well summarises the delusions of NZ's political parties in attempting to spend our way to prosperity.
Budget deficits can put more dollars in circulation. So in monetary terms spending our way to prosperity is a close description actually, though this creates additional government bond debt using todays monetary system. How else could the new deal programs have actually worked? Why else would the second world war have ended the resumtion of the great depression?
I am happy to leave you with your beliefs, but for those with a mind open to the "new deal" having made the depression worse:
http://online.wsj.com/article/SB123353276749137485.html#articleTabs%3Da…
Meanwhile people who actually research the subject,
'In a survey of economic historians conducted by Robert Whaples, Professor of Economics at Wake Forest University", Whaples sent out anonymous questionnaires to members of the Economic History Association. Members were asked to either disagree, agree, or agree with provisos with the statement that read: "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." While only 6% of economic historians who worked in the history department of their universities agreed with the statement, 27% of those that work in the economics department agreed. Almost an identical percent of the two groups (21% and 22%) agreed with the statement "with provisos" (a conditional stipulation), while 74% of those who worked in the history department, and 51% in the economic department disagreed with the statement outright.'
In fact as the economics professions complete inability to see the current crisis coming shows, most economists are really pretty poor at understanding this kind of thing. I think the historians are probably more accurate (because they actually do research). Of course your linked article is no more than propaganda purporting to be real analysis, and cherry picks the facts accordingly.
Members of the Economic History Association may be divided, but you do have Ben Bernanke on your side.
While I doubt that our current situation is directly analogous to the depression in the US, over the next 3-5 years we are going to find out if government directing spending to roading infrastructure works. If it does then TSY's PREFU may deliver us a government surplus in 2015 (complete with a large current account deficit).
While the following is nominally about China it has as its base a history of governments' spending on infrastructure and why it works initially but then doesn't - something that I believe has parallels with NZ's current government spending on roading:
http://www.financialsense.com/contributors/michael-pettis/2011/10/21/ch…
The stuff in the wsj is a crook of sh*t frankly.....they are attempting to re-write history so as to make themselves not look bad and the viable alternative, keynes not. As Paul Krugman says if you had listened to the WSJ editorial and not him it would have cost you a lot of money...
Your mind isnt open if you believe that rubbish, wake up and smell the coffee.....
regards
Where does the money come form to pay - PM ?
There are people on this site, who are capable of reading the times better and made proposals accordingly - then our megalomaniac parliamentarians and policymakers, who are very slow adapting to the worldwide accumulating and accelerating negative events. It seems the spending and economic developments just happening as usual. I wouldn’t be surprised New Zealand’s taxpayers paying a very high price for that reason. The question is – can we or are we just another society on the brink of collapsing in 2012/ 13 ?
Bernard,
I have been worried about debt levels for a long time and back in June 2009 i wrote to all leaders of all political parties. The only two who took any interest and gave a reasonable reply were Bill English and Tarianna Turier of the Maori party.
Bill English sent me a nice one and a half page reply and just to quote one small part he said
"I share your concerns about the risks and potential consequences of high levels of indebtedness. The more indebted a country is the more vulnerable it is to things going wrong. There are also benefits from debt. Taking on debt permits spending and investment to occur earlier than would otherwise be possible. It can provide a buffer when income is temporarily low, and help finance profitable investment opportunities.
Total debt in New Zealand is around 300 percent of GDP, compared to central government debt of around of 25 percent of GDP and debt owed to offshore parties of around 120 percent of GDP."
So that is part of what Bill English said in a letter to me in August 2009
As you can see this is not a new problem but one we seem unable to escape from.
Which is all the whinning you here about in here from the right wingers......however the problem is that the private debt gets handed over to us the second our Govn has to guarantee that private debt...and its has to our our banking system immediately collaspes and shuts its doors...we then cant buy food.....and that will get ugly very quickly.
Our one possible outlet is Bollard's living wills idea, if that can come in before this blows up then let it blow up......not because I want it to but because its going to, its just a Q of when......
Might as well leave the assets of the so called investors blown out as well....think I prefer the term leeches but there you go.
regards
I got this email the other day - somehow NZ debt situation is very similar..
The US Problem explained in simple terms !
Here is why S&P downgraded the US credit rating:
• U.S. Tax revenue: $2,170,000,000,000
• Fed budget: $3,820,000,000,000
• New debt: $ 1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $ 38,500,000,000
Now let’s remove 8 zeros and pretend it’s a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Proposed spending cuts: $385
Question:"How much trouble is New Zealand's in ?"
External Indebtedness – Australia in Bad Company ( Note where NZ is ~ Below...Greece, but above Spain etc. That can't be good !)Australia has one of the worst Net International Investment Positions in the developed world at -61% of GDP
(They) face action by “bond vigilantes” in the same way as Italy.
(Australias) position is worse than:
United Kingdom 2009 -13.1
United States 2009 -17
South Korea 2009 -17.8
Sweden 2010 -22.2
Italy 2010 -24.3
Slovenia 2010 -35.1
Mexico 2010 -36.5
Brazil 2009 -37.5
Kazakhstan 2009 -38.1
Turkey 2009 -44.9
However (Australia is) in a better position than:
Poland 2010 -63
Slovakia 2010 -66.4
Estonia 2010 -71.8
Greece 2009 -83.1
New Zealand 2009 -90.1
Spain 2009 -93.6
Ireland 2009 -97.8
Portugal 2009 -108.5
http://www.macrobusiness.com.au/2011/11/our-economic-model-is-dated-2/
Despite more than decade of Berlusconi governments and promises of reform, Italy's economy remains hide-bound in corruption, nepotism, a lack of productivity growth and growing youth unemployment.
And it's been that way since before the Roman Empire. Berlusconi could not have changed a thing, even if he tried.
Italian crime organisation stats are here near the bottom of this page. What can any politician do about this?
Well done people !
It is a good alteration – The rich deserve more ! – it is even an honest alteration combined with the picture of our PM Key – but is it New Zealand ?
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10765970
After all the billboard is a joke - even without the alteration - empty words again !
“BUILDING A BRIGHTER FUTURE” – without decent NZjobs - Key’s - “Smile & Lie Board”
No - sorry I don't like the guy !
...and he talks a lot, but says nothing.
No different from http://oweourfuture.co.nz/
All politicians are BS artists incl. the Greens!
CM - In principle I agree with you, but make sure to play fair - so please place sites from Labour/ National – and not what National/ Labour say about their opponents.
........ for once I have to applaud the Greens , they are 100 % correct , the rich do deserve more , much much more ...
Knock me down with a feather that the Greens have finally woken up to this truth ......
. .. and well done them for supporting National so heartily , in National's bid for re-election . Keep up the good work , Greenies ! ........ and bravo to you , Walter , for bringing up this topic . So gladdened to have you on our side , excellent .
The rich deserve more ..... Amen to that !
I console myself with the knowledge that at least if the John Key administration takes NZ into maximum debt during their two terms, the b----y socialists who will succeed them WON'T be able to - and you can bet that what THEY would have spent the borrowed money on would be a heck of a lot MORE wasteful than what Blenglish is spending it on.
At least we have a chance of still functioning as a society if when our credit is stopped, we have a few more new roads, rather than a few thousand MORE dependants on the State including in bureaucratic jobs for the boys (and girls) and in "Green" shakedowns.
Hey up GBH...don't forget to read Mondays 90 at 9 ...I left you an exclusive....Big B didn't pick it up and run with it.....uh duh...jokes aside let's just see how close I got in the coming weeks.
According to informed sources I was about as close as it could be.....I thought Big B was a newsboy now an economist later....ha ha.. have a great one matey..!
Sorry I mist that , Count .... the wind-up spring mechanism on this geriatric Toshiba computer is crunted ....... need to re-install the rubber-bands .....
.... feck , firebox has gone out again ...... shag.......
[ .. a little something for you , Count ..... check out page A3 of today's Press .... wanna give her some " diversion " ? ..... yee haaaaa !..]
Bunga bunga owns the pot Gummy....the Frog has yet to wake up to realise it's in the pot...although S&P did ring their alarm bell a day or two back....wild bill is working hard to include Kiwi .....how you like that on your plate....boiled Frog with Kiwi served in grease by Manwell.....with a glass of Grimess,,,,,
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