By Bernard Hickey
Drug addicts and alcoholics can appear normal, even when they're drugged and boozed up to the eyeballs.
They can stumble along and even go to work as long as they are 'medicated'. Sometimes it's hard to tell if they're drunk or not.
It's only when the drugs and the booze are withdrawn do we see their real state.
They break out into a sweat and start looking anxiously for new sources of their chosen drug.
We saw this week what happens when financial markets and investors addicted to freshly printed money find out someone might actually withdraw the drug in the nearish future -- they go into withdrawal.
Stock markets all around the globe slumped this week when US Federal Reserve Chairman Ben Bernanke threatened to turn off the money printing drip by the middle of next year.
Long term interest rates rose sharply.
Most importantly for New Zealand, even China's new leadership got in on the act, forcing up interest rates to their highest point in a decade.
The New Zealand dollar fell three US cents to its lowest point in a year.
Banks started putting up fixed mortgage rates.
Essentially, financial markets broke out in a cold, cold sweat.
Now we'll see just how sustainable the economic recoveries in America, China and New Zealand are. Can they survive with higher interest rates? Are we about to see yet another false start before a lapse back into a medicated remission?
It will all depend on just how addicted a broad swathe of the developed economies are to low interest rates.
That actually means consumers and households, who are responsible for more than 60% of the spending in these economies. That in turn depends on how indebted they are and what is happening to their real incomes. That is the truest measure of their economic health.
On that front New Zealand shares a big problem with the likes of the United States and Europe. Our household sectors are still heavily indebted and incomes for the broad swathes of consumers in the middle and lower income groups are actually barely above where they were five or six years ago.
GDP figures out this week show New Zealand's real per capita GDP is actually still 1.3% below where it was in 2007.
Most of the gains in any economic recovery that has happened have gone to the top few percent of the population. Property owners in Auckland and owners of stocks have been the major beneficiaries.
A US study of the recovery there from 2009 to 2011 found the top 1% of the population saw their incomes rise 11.2% in real terms, while the real incomes of the bottom 99% fell 0.4%, which meant the top 1% captured 121% of the recovery's gains.
That's because the tactics used by central banks and governments to stabilise the financial system and boost the economy only worked to increase prices of assets such as property, stocks and bonds.
They didn't increase the real wages of the 99%.
The 99% remain heavily indebted, often unemployed and struggling to pay their bills.
Until those debts are restructured or some major structural changes happen to the way income is earned and distributed, the developed economies will struggle to stand on their own feet for any length of time.
A true rehabilitation of the economy requires tax reform to more heavily tax the incomes and assets of the wealthiest 10% and then redistribute that as income to the bottom 90%.
Until then, all we'll see is addicts sweating and thrashing around before the next dose of cheap money is administered.
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This article was first published in the Herald on Sunday. It is used here with permission.
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