As we enter the last couple of months before the general election it is worth talking about the unspoken cancer at the heart of New Zealand’s economic system. It seems to be off the election agenda. Sure it is not a purely kiwi disease but there is post GFC a smugness among many New Zealanders about how lightly we escaped the fallout from 2008 and a willful resistance to consider whether we will be so lucky next time.
The cancer no one wishes to discuss, because hey it bums you out, is debt.
National don’t want to bring it up because the Key government has taken on so much of it to support private consumption post 2008 and prevent the property market, and the banks that back them with their loans, from going into free fall. Private debt levels (as a percentage of GDP) are approaching levels seen pre GFC and government debt is considerably higher. If another financial crisis hits in the next decade – almost certain – any government will have far less leeway to borrow than did National in 2008.
Labour is no better because the previous Labour government paid down public debt but with the tax receipts from an economy going gangbusters on private debt and the positive vibes of a run away property market. Labour is as committed as National to a debt fueled property based economy with no Plan B.
Russel Norman of the Greens at least recognises the problem but knows no one wants to hear so has backed off and focused on building rapport with Labour. Why be negative and garner unpopularity before an election? The Greens are so focused on the prospect of cabinet seats they have become the only Green party in the world to not mention or promote “steady state” economics because it’s mocked as anti growth and seen as too fringe.
Winston Peters, far from his apogee of tormenting the financial elite like Michael Fay that did their best to create a financial plutocracy in this country, has failed to put two and two together and work out that the corrupt financialisation, inequality, asset sales and high house prices he rails against stem from rampant debt/credit that forms our money supply. He, like the rest, only proposes fiddles and tweaks to taxes and government expenditure, pretending or delusionally believing his fiddles will be more effective than the others tweaks.
None of them are addressing the sustainability of the growth in private debt and how it demands ever growing consumption and resource depletion to pay the principal and interest. They either have a vested interest in the perpetuation of this crazy cycle via asset prices or are convinced that speaking frankly will be political suicide short term. No one thanks you for being right long term.
We have, like others, built an economy that is based on credit and getting consumers into debt in order to keep “growth” going. But the amount of debt people take on has to keep increasing in order to service the pre-existing debt. It keeps increasing until the national economy can take no more or hits a terms of trade crisis (like NZ has many times over collapsing wool, dairy and meat prices); or in a globalised and interlinked financial system, another country’s crisis becomes globally systemic like the GFC.
After close calls with the 1987 crash, Asian Financial Crisis in 1997, LTCM crisis in 1998, Dot Com melt down in 2000, this way of doing things should have ended with the GFC in 2008 but instead ultra low interest rates have kept the old way of doing things on life support. Kicking the can, extend and pretend, whatever you want to call it.
Rather than use the time bought by all the emergency financial measures as an opportunity to reform the financial system to something more sustainable, politicians and bankers have instead decided to inflate another housing bubble. In this both National and Labour are one trick ponies. The whole scenario of house prices accelerating away from incomes and rents started under the Clark government. National have only revived it. Both Key and Cunliffe have been explicit that they don’t want house prices to fall. Really they mean in Auckland. In many provincial areas prices are still well off their 2007 peak. Yet without significant price falls, property in Auckland will never return to widely accepted levels of affordability that preceded the credit boom of the last 15 years.
House prices may very well continue to inflate and mortgage size along with them, but debt by its nature is a call on future earnings and as long as incomes increase at a far smaller rate, a greater and greater proportion of household income will have to be diverted to mortgages and the banks, and less to the rest of the economy. The further property prices and debt diverge from incomes the closer we get to a tipping point where the rest of the economy shrivels, eventually halting even the property juggernaut with rising unemployment and negative sentiment. The best that can be hoped for is a low level recessionary condition where the economy bounces along at its debt capacity, people paying down a little then borrowing again but never able to reach escape velocity because of the drag of the debt overhang.
Hyman Minsky gave a compelling case for his financial instability hypothesis. Basically the greed, hubris and complacency engendered by easy credit and loosening regulation feeds asset price booms but also sows the seeds of its own destruction. At some indeterminate high point an event causes sentiment to suddenly change and the markets that have been fed by ponzi type speculation collapse, bankruptcies and liquidations occur depressing sentiment and prices even further and the economy enters at best a deep recession, at worst a depression.
Politicians and bankers are vaguely aware of this and hence the need once things have gone too far to try and keep sentiment and prices buoyant with “good” news. Rising house prices and GDP are a godsend to governments and consumers alike. They appear to justify policies and borrowing decisions. This is reflected in the often heard sentiment “if only we all stay positive everything will be alright”.
Perhaps in a less leveraged and self contained economy this might be the case. New Zealand is not and never has been. Our history is littered with cases of high levels of borrowing and speculation, booms and bust going bad. The globalised financial and free trade environment has made us even more vulnerable to a sudden stop event, be it internal or external. The higher our external debt levels and current account deficit, the greater our vulnerability. We have become a ponzi nation.
So what can New Zealand do to decrease the danger. It desperately needs a Plan B and a Plan C. Unfortunately neither will come from National or Labour. Despite the current economic orthodoxy being absolutely discredited by the series of crises mentioned above, neither party seems willing to entertain any alternative, National in particular labeling any deviation “kooky” or irresponsible. Basically they are scared witless by the Armageddon threat of the financial markets or they and their core supporters and benefactors are personally benefiting from it and see no need from their perspective for change.
There are always alternatives. Surprisingly many are starting to emerge from the IMF (and here), for so long a bastion of orthodoxy. There are the ideas of Adair Turner, Steve Keen, Herman Daly and other heterodox economists. There are also alternative ideas around tax and welfare like Gareth Morgan/Susan Guthrie and Edgar Feige as well as banking reform like Huber and Robertson. These and many more theories need to be at least debated. Capitalism is not dead but it needs radical reform. The financial capitalism we have endured for the last 30 years should be consigned to the dust bin along with the politicians and parties that remain its advocates.