The New Zealand Economy is Sinking While Financial Assets Soar
March 23rd, 2007Kiwis hate it when I talk about the New Zealand economy. Sorry, mate, a Ponzi scheme is a Ponzi scheme. Most national economies are really just subsidiaries of the U.S. Mega Debt Death Machine now.
If you want to wind a Kiwi up, ask him or her which country is New Zealand’s second largest trading partner? DOH! That one smarts really bad. It’s the U.S.
Now, what does this have to do with all of these carry trade antics?
As the U.S. dollar collapses, that part about New Zealand’s second largest trading partner goes from being an embarrassing reality, that most Kiwis would rather not think about, to a national emergency.
Why?
Lots of dairy products wind up in the U.S., and meat, and kiwi fruit, and, and… If Americans go bust, A) who’s going to buy that stuff and B) what are they going to pay for it with?
Hmm?
What, then, happens to New Zealand’s ability to repay its debts, which are massive, relative to New Zealand’s size, without all those American Ponzi dollars?
Hmm?
This post is more for Kiwis than anyone else. I love New Zealand and I hope that the Kiwis who read Cryptogon are getting ready for what is going to happen. It’s going to be rough, but I wouldn’t want to be any other place in the world.
Note: The guy who wrote the story below is a gold salesman, by the way. I’m not endorsing gold as a solution to this situation for reasons that I’ve laid out repeatedly. Of course, I could be wrong, and might be very wrong on gold. It’s all a matter of how many people drink the KoolAid, whether it’s gold, silver, sea shells, shovels or chocolate bars. But I know leveraged swindling when I see it. I wouldn’t base a religion on an asset that trades in real time in leveraged fiat funny money, like gold. But that’s just me. Your results may vary. Batteries not included. (I love the hate mail I get from comments like this from the gold bugs. It’s some of the best entertainment available out here, thousands of miles from nowhere.)
Via: Daily Reckoning:
In plain English, financial assets have soared, but the real economy has sunk. In 2006, New Zealand racked up the 15th largest trade deficit in the world. Not bad for a nation of just four million people. (The US came top, followed by Spain and then Britain.)
New Zealand’s also got a max’ed-out housing market and a bubble in consumer-credit. Its currency looks over-valued on any kind of fundamental basis. And sitting atop this must-have collection of “haute finance†springwear – as worn by all of the most fashionable Anglo-Saxon economies this year – you’ll find an inverted yield curve.
Just as with Sterling, US and Australian Dollars, it’s now cheaper per annum to borrow New Zealand’s money for repayment five years from now than for repayment in 2008. The bond market doesn’t believe rates will stay high, in short. So why bother hiking?
“There’s increased skepticism that the combination of high rates and the high currency will be sustainable,†reckons John Body, head of financial markets at ANZ National Bank in Auckland. “It could lead to a slowing of the economy and so we could see the exchange rate go down.â€
“New Zealand’s growth is skewered to the downside and that has sucked fresh buyers from the kiwi,†says Body.
But most problematic of all, however, is what’s going to happen when all those Euro-Kiwi and Uridashi bonds reach maturity. Tokyo and Frankfurt investors alike will need to redeem the bonds with Euros and Yen. And to raise that cash they’ll need to sell New Zealand Dollars.
New issues of Uridashi and Euro-Kiwi bonds peaked at the end of 2005. A two-year play on the free profits between New Zealand rates and the low-yielding currencies proved most popular. So redemptions are set to peak at the end of this year.
Okay, the “free money†gap has since widened out to 700 points. That might help create fresh Uridashi and Euro-Kiwi bonds for a while. But when confidence in the New Zealand Dollar finally catches up with the hard facts of New Zealand’s own cash-hating economy, something’s going to give.
Kev,
Post the hatemail if you can! I love that sort of thing, it can be truly hilarious.
We need not discuss currency exchange values (ratios of imaginary things) or commodity prices (ratios of imaginary things to something real) to reveal how bizzare NZ’s economic situation is. For me, the truth of the madness is in the real estate. A average house in the Waikato costs seven years of an average gross income. A house is a real thing and so is a year of labour. This extreme ratio (normal is closer to three) has never been sustainable before in any economy in history. I am very happy to be a renter for now.
@ Alek
The NZ real estate bubble has got to be one of the weirder bubbles around.
It’s extreme.
@ Matt,
All I’m saying to the gold bugs out there is that it’s a gamble, like any currency, stock or bond bet. I know. I know. Gold is real money, hallelujah! It’s the tone of certainty that many people have about gold going up to _______ (fill in the blank) that scares the hell out of me. It might, and I hope it does, for all the gold bugs out there.
But it might not.
My guess is that in some kind of soft crash, where the system survives in some form, people holding gold could do VERY well.
But in a harder crash…
Say someone wanted one of my calves, would I take gold for payment?
No. I’d consider a couple of sheep or a bunch of chickens or some tools, but I wouldn’t have much use for gold.
In all fairness, I’m the first to admit that I have no good answers for where to put wealth, besides my broken record record responses: land, tools, infrastructure… self sustaining biological systems… la la la blah blah blah
For now? Hold some gold! It couldn’t hurt. I wouldn’t mind having some myself. (I was forced to sell all of mine to buy the farm, and I’m glad I did.) But I wouldn’t bet my future on it. Gold just doesn’t rise to my expectations of what a strategic asset should be. My land does. My all steel shovel does. My ax does. My hammer does. etc.
an hour of my time
is worth
an hour of your time
period
we are all equals
community currencies work this way
http://en.wikipedia.org/wiki/Ithaca_Hours
http://www.humboldtexchange.org/
the global economy is the biggest ponzi scheme of all…
Isn’t an obvious good store of value addictive drugs?
If anything, they’re very likely to greatly appreciate after a crash, when supply lines get disrupted.
I’m personally morally opposed to selling people things that will damage them, so I don’t feel good about doing anything like that. Kevin’s points about the investment value of actually usable/productive assets are well taken.
But economically it seems to make sense; a good portion of the dollar’s value already represents drugs-as-commodities, as CH Fitts has pointed out, so I gotta figure that somebodies are using drugs as a hedge already and that this behavior will increase.
>>>Isn’t an obvious good store of value addictive drugs?
If anything, they’re very likely to greatly appreciate after a crash, when supply lines get disrupted.
– – – – –
You know, I’ve thought about this for years and could never come up with a good answer: How are They going to emerge from collapse with anything like the wealth They had this side collapse???
P, yours is, by far, the best answer I’ve come across yet.
I’m a Kiwi, living and now renting in a small provincial city. My wife and I sold our home and business and put as much of our assets off shore as we could – into oil of course. The NZ economy is a house of cards.
Consider toilet paper.
You are sure to use it (eventually), it keeps well (provided it stays dry), appreciates with inflation (based retail price increase over last 3 decades), and post-crash people will still want it. Badly.
Ever tried to use a corncob for that purpose (toilet tissue’s predecessor)?
Paul — Please explain how you invested in oil.