By Bernard Hickey
There's a question at the heart of the global economic malaise that is also a key question for John Key: What happens if everyone saves at the same time and stops spending?
The Prime Minister seemed to capture the mood of the moment before the November 2011 election when he called on New Zealanders to vote for government austerity and 'zero' budgets to keep net public debt below 30% of GDP.
This public desire for self flagellation was counter-intuitive to an MMP generation where politicians bought off voters with ever more of their own money.
This austerity theme has been the central to this government and the public have largely accepted it because austerity and debt reduction is at the forefront of our own household budgeting thoughts. John Key's uncanny knack for judging the public's mood didn't fail him in 2011.
Ever since the Global Financial Crisis, most New Zealanders have been trying to pay down debt. Households kept their mortgage payments up at 7% mortgage rate levels even though rates fell towards 5%. These repayments are almost offsetting a surge of lending at the fringes to first home buyers and some returning rental property investors.
Total household debt rose just 1.8% in the year to the end of June to NZ$187.9 billion, which is less than growth in household income. That means households are beginning to de-leverage, albeit slowly.
Also those who have already paid off their mortgages are saving more. Household deposits rose 8.8% to NZ$108.9 billion in the year to end of June. To put those two forces together, household deposits rose NZ$16.8 billion in the last two years, while household borrowing rose NZ$5.2 billion.
That means NZ$11.6 billion less was spent in places where it could be recycled in the form of wages, profits and taxes. This is one reason why voters didn't mind voting for austerity. It seemed fair that if voters were denying themselves spending, so should the government.
It also seemed to make sense given the government had been on a real spending spree in the years before the 2011 election. Luckily for the economy, the government spent an extra NZ$7.2 billion in the last two years. That offset most of the NZ$11.6 billion less being spent by households.
But now we have a problem.
The government is carrying through on its promise to run 'zero' budgets over the next couple of years. There will be no offset to the continuing restrictions in spending by households as they save more. That means the businesses and exporters are expected to pick up the slack by spending and earning more. The trouble is they're not, in part because the rest of the world is doing exactly the same thing, spending less and saving more.
This is the Paradox of Thrift.
It makes sense for one household to save, but when every household, the government and businesses do it in tandem, you get a recession.
When everyone in every country does it, the whole world has a big, big problem.
Right now policy makers globally are almost all now fixated on austerity and debt reduction.
They're all assuming someone else will pick up the slack and spend money on whatever they're producing. The Chinese mostly assume it will be the Europeans and Americans. The Americans and Europeans are hoping it will be the Chinese. New Zealand hopes it will be the Australians and the Chinese.
It's as if a bunch of cricketing outfielders are all looking at each other shouting 'Yours!', only for the ball to drop to the ground between them.
At some point policy makers will have to pull out of this Global Paradox of Thrift, including John Key or whoever follows him.
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This piece first appeared in the Herald on Sunday. It is used here with permission.
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