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RBNZ's Bollard warns deleveraging still has a long way to go; NZ private debt too high to be sustained; 'Persistently high NZ$ noted

RBNZ's Bollard warns deleveraging still has a long way to go; NZ private debt too high to be sustained; 'Persistently high NZ$ noted
Dr Alan Bollard, RBNZ Governor

Reserve Bank Governor Alan Bollard has warned that New Zealand's private and foreign debts were too high to be sustained and the deleveraging of that debt would take some time to play out.

He said this deleveraging was playing some role in New Zealand's currently low growth rates and the economy had yet to rebalance much towards exports, which he said was not suprising given the 'persistently high exchange rate', which was influenced by the adverse global economic climate.

Here is the release below from the Reserve Bank.

New Zealand may be dealing with the aftermath of the large increase in private debt for quite some time, Reserve Bank Governor Alan Bollard said today.

In a speech to the Employers and Manufacturers Association in Auckland, Dr Bollard said governments, firms, farmers and households across many parts of the advanced world took on large amounts of debt in the last couple of decades. He noted that rapid increases in indebtedness have often foreshadowed a difficult period for the economy.

Fortunately, New Zealand avoided the sort of costly systemic financial crisis that a growing number of other countries faced, and while government debt had increased substantially it remained low by international standards.

“But it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained,” Dr Bollard said.

The accumulation of debt owed by individual firms and households, and borrowers disappointed that incomes and asset prices have not gone on rising as they expected are “clearly playing some role in the low rates of growth New Zealand has seen in productivity and GDP,” Dr Bollard said.

Private sector deleveraging is underway, but Dr Bollard said it is a slow, gradual process.

“In a single country facing weak domestic demand, resources can switch relatively readily into sectors more reliant on external demand. But it is hard for that to happen in a large chunk of the advanced world all at the same time,” Dr Bollard said.

“As yet, not much of the expected rebalancing of the economy, particularly towards exports, seems to have happened – perhaps this should not be too surprising in view of the persistently high real exchange rate, itself partly influenced by the adverse international climate.”

“Even at an aggregate economy level it looks as though we could be dealing with the aftermath for quite some time yet.”

(Updated with link to full speech)

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33 Comments

Deleveraging is good.  it gives strength to companies and individuals alike.  Look ahead at what might happen to over indebted farmers if the protein price does not hold up.  Any of them with any brain is reducing debt as furiously as all possible.  Such moves will protect them.  !n the face of that threat "growth" just does not offer much

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KH did you see psost from just last week? farm debt is at an all time high and farm values have fallen 25% from peak. a fair whack of farmers are borrowing to sustain operating costs. Paying off debt is secondary to this

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Borrowing to pay operating costs.  Because they have too. Oh Dear.   'Deleveraged' too late I guess.  Or should never have borrowed to get into the business in the first place.

But there will be a spread.  Some will have low debt (clever -not lucky) and some will be struggling to pay down debt - but managing to do it.  (it's the only sensible thing to do).

Equity is strength and makes money at a surprising level.

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Sounds like heavy gambling.  If you are borrowing to pay operating costs, then you should be asking is this an ongoing thing.  If you have bought on the assumption that (say) milk solids are always going to be above $6.50 long term (say)  and that isnt going to happen you are going to go bankrupt.

regards

 

 

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Yes.  Look for some bankrupt dairy farmers if this is what is happening.

Borrowing to pay operating costs.  Almost always a disaster short term and always a disaster if continued.  Same for governments, individuals and farmers and Greece.

Trouble with government spending is the OPM factor.  (other peoples money)

  

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When everyone else is devaluing, but have resiliant currencies (perceived as low risk) and we are not then I dont know just how we do this without risk of collapsing all of a sudden...All we could do is print....but its like walking along a cliff egde in a fog IMHO, you odnt know where the edge is but one thing you do not is teh fall will be fatal...

regards

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double post!

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Did Bollard say anything about what he could do about the exchange rate.  Apparently not.

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Look for flying pigs.

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As an exporter I find it extrodinary that Bollard expects us to switch from domestic demand to export focused demand when exporters costs are choking the life out of them. The rebalancing is going to have to be much more severe than the govt is planning.  The currency alone will not be enough to save us, its going to take massive change especialy in government, which needs to downsize rapidly. Why only last week fuel and roaduser taxes were increased, the signal to producers being ? use less. Thats what I think is going to happen, exporters will produce less to cut costs what other options do they have? its what Im going to do.

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What??? whos sick of hearing the same rubbish from these guys. NZ urgently needs some real leadership.  What deleveraging?? where do they think the lastest AKl property madness is coming from, Kiwis savings haha. Guess what exchange rate is high causing more NZ exporters to go belly up while we continue to borrow more and more money to pay more and more for each others houses.  How can this not be regonised as the disaster that it is for NZ.

They lack the courage to do anything about it, one thing is for sure it is going to blow up in all of our faces sooner or later and then the blame game will start when its too late.

 

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No need to accuse people of being liars, just because you don't know where to look on the internet.

http://www.rbnz.govt.nz/keygraphs/Fig5.html

The fact that recent trends in Auckland house prices probably won't show up here (once the statistics are collected) points to the fact that the property market is not quite as simple as is often imagined.

Maybe you should be the courageous leader you are looking for?

 

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Did I accuse them of Lying?  No I accuse them of doing nothing.  They say the right things and then don’t back their words up with actions.  As for the graph of course I have seen it, it looks back and plots debt versus disposable income.  Disposable income in this country is being propped up by massive government borrowing, when that ends what’s going to replace it? Then we will see how your famous graph looks.   Bottom line is we can’t actually afford the prices we are paying for each other’s houses/farms and sooner or later we are going to wake up to the fact that we have been left with a heap of overpriced boxes and generations of debt.  Property market is actually very simple in this country; if every kiwi was given the ability to borrow 2Mil then average house price would be 2Mil. 

 

The latest Akl madness will show up, just too late for you and your internet research to make any sensible decisions.  If you can I would like you to point me to a site where we can see the private debt of this country in the same way as for the public debt -  http://nationaldebtclocks.com/newzealand.htm

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Oh, sorry, I assumed you accused them of lying because you were oblivious to the obvious source of their statement that de-leveraging was happening.

Care to elabourate how 'Disposable income in this country is being propped up by massive government borrowing?' I don't really see much that the government has to do with it. It appears much more clear that primarily 'Disposable income in NZ is (or at least was) being propped up by massive mortgage borrowing'. Also I should point out that the total figure of household debt is significantly larger than the total government debt.

I would be very, very surprised if the next data point is not lower when its added to that chart.

Maybe you ought to have a think about what the government should do about it before complaining that they are not doing anything.

 

 

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Oblivious I am not, you and anyone who actually believes deleveraging is happening could be called that.   I see we still have a current account deficit, what does that mean O we are living beyond our means as always.  No worries, it is fine to run consistent deficits as long as someone else is running surpluses; however the end game to that is your assets actually end up being owned by that someone else, maybe you don’t understand that basic economic principal.  Why do you think the government is selling assets, because we can’t afford our lifestyle with the amount we earn so we borrow the difference.

And how do you think peoples disposable incomes would look if the Government started actually living within its means, take back the tax cuts, get rid of WFF, raise super age etc etc I think you would quickly release that we are being propped up.  Yes it was being propped up by private borrowing which was then taken over by government borrowing to save as from the harsh medicine of true deleveraging, and because we weren’t allowed to learn our lesson we are back at it in the ALK property market.  So now we will have climbing private and public debt.  Well done NZ.  As for solutions, obviously we need to take our medicine and allow deleveraging to take place.  Implement Capital gains tax on all property, cut back government spending, open up more land for development etc (in essence pop the property bubble and get on with rebuilding the real export economy rather than dragging out the unavoidable sticky end that we are currently heading for, which will be all the worse due to 4 -5 more years of borrowing/living beyond our means)

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I think the claim to deleveraging is actually a little dubious reading that graph. Although you could always enterpret statistics and the data isn't really enough to determine what is really happening, the deleveraging claim should see the blue line rise instead of descend as it has done. It should certainly drop faster than the brown line anyway.

 

Not sure if the debt is nominal or absolute with that graph either, if absolute then the nominal debt has still gone up. It is just the cost of the debt that has gone down. This sentence seems to support the proposition that debt is still rising, just not rising as fast: "This deceleration in the rate of growth of household debt arrested the growth in the debt to income ratio from 2007."

 

I would certainly welcome someone else taking a look at it though.

 

 

 

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I call that de-leveraging, as the debt component is becoming less of a burden, though as pointed out that is due to a rising income in fact.

I think its a bit more clear in some of the other sectors of the economy as well.

Steve Keen has done a lot of analysis of the acceleration of debt to GDP, and I think the deceleration of the debt to GDP ratio might be linked to the Auckland house price burst recently this way. E.g the de-leveraging rate of decline slowed and that gave people an incentive to jump into the Auckland market. I guess the question is can that rate of decline keep going and turn into a rate of increase eventually.

Though it would be very easy to over-think that, e.g the Auckland property boom could be some kind of secondary effect of the Christchurch situation or something.

 

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So you were accusing the RBNZ governor of being a liar when he sited de-leveraging? I am not accusing you of being a liar when I point out he was not lying of course. But get used to people saying 'deleveraging is happening', obviously there are other sectors which are also exhibiting signs.

Well I think running a government may be a little more complicated than you think. I also think that returning tax cuts, getting rid of WFF will probably make the property situation worse, though there may be fairer ways to target that government spending than the systems already there. There are a number of economists who agree that cutting back government deficit spending (as Greece, Ireland, Spain and the UK have done) is counter productive and so the countries where it has been the most severe in the Euro zone Greece, Ireland, Spain and on the side the UK, are the deepest in recession or in some cases closest to default.

Appart from this many people who receive these tax cuts and the WFF program or are receiving a pension are not the same people who have borrowed into property, which seems to make targeting these programs for a property problem a little unfair to me.

 

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Nic

Here's the stats on household debt from RBNZ site. http://www.rbnz.govt.nz/statistics/monfin/c6/data.html

Shows total debt up 2.8% in nominal terms or about NZ$5 bln to NZ$187.9 billion in last 2 years. Slight decrease in debt to GDP, but not that much. Long way to go to get anywhere like a normal level of debt of around 100% of disposable income.

At current rates of deleveraging that's about 15-20 years of slow growth.

We do have a problem.

cheers

Bernard

 

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Thanks Bernard, and I bet we are going to see it spike over the next few months unless some outside NZ factors occur to slow the property market.  I have come to the conclusion that kiwis actually must have a genetic flaw when it comes to property investment, one which has been breed in by successive governments.  We are just jumping over ourselves to load up on debt, can’t go wrong as property is going to double again in the next 10 years and the 10years after etc.  That’s what I keep hearing; don’t hear the same about my wages though.

 

O forgot to say, yes debts up 2.8 % and that is over a 2 year period when we had record high prices for our exports.  Next 2 years looks like it is going to be different.

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Thanks Bernard. I totally forgot that the trend in the first graph was mostly due to a rising GDP. Funny that, the recession turns up and suddenly every household is more productive, it seems a bit odd (were we not suppost to be depressed)?

I guess that allows for a national private debt clock, its total is 187, 801 NZ million dollars and it ticks up at a rate of 631 NZ million dollars per 30 days. About $232 NZ dollars per second (based on the last two periods only, so a terrible estimate). That's about $42,690 per citizen using similar citizen numbers to the debt-clock, and last months total.

 

 

 

 

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Got no idea have you Nic!  One graph for you is all that is needed without a total across board view that Bernard just gave you below eh?

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No, and I did forget that the trend in the household graph was down to rising GDP more than falling debt. But its more than a bit steep to accuse the RBNZ governor of lying, there are some facts which back the governor up.

 

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it is fair to note that we have suspected for a long time that New Zealand’s private and external debts were too high to be sustained

Mwahahahahahahaha

and

 

As yet, not much of the expected rebalancing of the economy, particularly towards exports, seems to have happened

mwwahahahahahah

 

Economists.  He should have been a stand up comic.  "Look. Lets pull on this lever... Jeepers... Nothing is happening as the text book suggest it should

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Five words: Hell in a hand-cart. And on that graph Nic posted, it looks very much like the decrease in household debt is beginning to level out. Surely with property market going up again and banks signing up record numbers of new suckers.... I mean clients to mortgages, surely that's going to trend upwards before long.

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If the bank dropped the OCR to world averages it would drop our exchange rate.  If the banks followed it would allow mortgage holders to pay more of there debt off.  To counteract the possible rise in house prices the government should put in place rules for banks that borrower's need 10%/20% deposits and loans can only be 3 ~ 5 times earnings. Is this to hard to do?

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Love your idea keriwin. It will force more potential house owners into renting, increasing tenant demand and therefore my rents.

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Oh come on you lot......Let's Wait n See...shall we..?

Bolly........ Now , Wheeler..! did you just hear the way I delivered all that claptrap without suggesting there was a hope in hell I was intending to do anything about it, and at the same time showing a kind of pathetic sense of empathy...?

Wheeler....why, yes I did Bolly...!

Bolly....don't call me Bolly...!

Wheeler....erm sorry Alan , yes I did.....

Bolly....we'll that..! my boy ,is waiting and seeing in action....!

Wheeler.....right...! so, still doing nothing but letting them know we know what the problems are....!

Bolly ........Exactly, now they know we know, they think we're on top of it you see..!, but, we're really waiting and seeing while they .....think.... we must be planning an action.

Wheeler (in awe)......right, brilliant so...?

Bolly.........Sooo, we appear  relevant, concerned, but not ultimately responsible..!...eh ...uh..?

Wheeler...( a bit moist now)..Oh Sir..!

Bolly...Sir.? hmmmm..I like that...!..yes I like it a lot.

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 "that..! my boy ,is waiting and seeing in action.."

Priceless!
 

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An excerpt from Bollard's speech.

 

Higher household savings rates raise household wealth, but whether they alter gross household debt very much depends on who is doing the increased saving. For example, if people with large debts are now feeling overburdened then any increase in their savings will typically reduce the aggregate level of household debt. Many of the most indebted households are already quite cash-constrained. On the other hand, most households have little or no debt and if it is predominantly those people who are saving more, whether because the economic climate encourages greater caution or perhaps because lower interest rates (and lower expected asset returns more generally) makes building up adequate retirement savings a bigger challenge, household financial assets may rise, but with little observed change in household debt.

 

I find the above a distrubing insight, which leads me to think the Governor believes high debt levels are here to stay along with consequent low to zero GDP growth prospects.

 

A government reliant on growth to enhance it's election prospects will resort to excessive borrowing to create extra GDP output. The inevitable conclusion is government reliance on the saving majority's funds to stave off liquidity issues and possible insolvency, in the event foreign creditors decline our demands.

 

From ZeroHedge:

History shows that bankrupt governments routinely resort to plundering their citizens’ wealth to keep the party going.

 

Bottom line, if your government is insolvent, your savings are at risk. And opening a foreign bank account is one of the most important things you can do for your savings. Greeks are starting to figure this out the hard way.

 

 

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Stephen, some guy called Bazza posted this in the Telegraph comments after an article about the EU.

>>>>

 

I am not saying there are no hardworking people in any western country.  In all of them there are hard workers.  But that is not the general pattern.

Western countries are self-indulgent, complacent and have institutionalized bludging, from those on explicit welfare, to most of the public service and politicians, to the ripoff merchants who constitute the high paid part of the financial sector, and many more.

The EU and the EZ are the epitome of this.

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"New Zealand may be dealing with the aftermath of the large increase in private debt for quite some time, Reserve Bank Governor Alan Bollard said today."

 

And...........who encouraged all those plonkers with a too low OCR for near a decade Alan? Who encouraged the bubble by following the Greenspan (US FED) plan post 9/11?

 

YOU! 

Bollard either thinks we are stupid ( some are, hence the huge personal debt binge) or............he is the most ignorant over paid dullard on the planet

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Looking at the RBNZ table C6 Total household claims; registered banks and NBLI,  I can see no material reduction in the past 3 or 4 years, I can only assume that the reduction is due to household assets increasing and therefore the relative level of indebtness has fallen.

Given that if asset prices fall, and there is no corresponding fall in household claims which is usually the case, debts don't fall, the so called current deleveraging has not occurred but is based on asset price having increased (which are over valued to start with).

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