Dear John (the last Bernard Hickey blog)
While some on the right pretend that it’s gonna be okay, we here at Tumeke have been questioning for sometime the wisdom of borrowing from the developing world to fund a first world consumer culture of plasma TVs, SUVs and plastic surgery all on credit cards in an overheated property speculation market that had no capital gains tax to cool it. We’ve questioned the wisdom of unsustainable capitalism and as his last blog shows, Bernard Hickey paints a grim reality check on just how bad it’s going to get with the speech John Key SHOULD deliver to a country still in utter denial of how bad it is going to get.
Clear throat. Look uncomfortable. Deliver in a sober manner. Shouldn’t be a hard delivery style.
Fellow New Zealanders, I have a few uncomfortable things to say.
I think it’s time we confronted the most serious threat to our economy in 80 years with a common understanding of what went wrong and how to fix it.
We will get through it, but it’s going to take more than a decade and most New Zealanders will experience lower standards of living during that time. We need to work together to make sure our social safety net catches everyone as they fall and that it becomes a type of trampoline that bounces everyone higher when the recovery comes. We need to embrace the idea of spending less, saving more and investing more.
Firstly, a few home truths.
Most of us spent much more than we earned for the last five or six years. We bought too many cars. We bought too many flat-screen televisions. We went on too many overseas holidays. We bought too many useless things that are now just cluttering up the basement.
Our economy seemed to be growing stronger and longer than it normally did. There’s a reason for that. It shouldn’t have. This economic growth was fuelled by foreign debt. Our net foreign debt has almost hit 100% of GDP and that is all private sector debt. That makes us the second most indebted developed country after (pause for effect) Iceland.
There’s a reason for this. We spent much more than we earned for almost a decade. We borrowed the deficit between the spending and earning or sold our assets to foreign investors to bridge the gap. Now we have so much debt and send so much in dividends overseas that we are struggling simply to pay the interest on the old debt. Essentially, we are now borrowing more to pay the interest on the old debt. That is utterly unsustainable.
This is why our current account deficit is now around 9% despite several years of an export price boom and a sharply lower currency. We are now in a select group of six advanced economies with current account deficits of over 8%. This group includes Spain, Greece, Portugal, Cyprus and (pause for effect) Iceland. Spain, Greece and Portugal have all had their sovereign credit ratings downgraded. Their unemployment rates are rapidly heading towards 20%. We all know what happened to Iceland.
New Zealand’s Treasury is now forecasting a current account deficit of 10.6% for 2010, given that its “downside” scenario is now its central forecast because of the significant deterioration in the global economy in the last two months.
Standard and Poor’s has warned us that our credit rating will be downgraded unless New Zealand’s government can come up with a “credible medium-term strategy” to reduce the government’s debt. That’s because the current “downside” central forecast is that without changes in our approach the government’s gross debt will hit almost 80% of GDP.
This is important because up until the last year or two the government was saving while consumers (that’s most of us) were spending and borrowing. New Zealand can’t have both the government and consumers spending and borrowing at the same time.
We must bring down our current account deficit and reduce the outlook for our public and private debt. There is nowhere for New Zealand to hide now. The warning from Standard and Poor’s was effectively our orange light. Foreign lenders are hunting down economies that borrow too much and they are forcing them to stop. They do this by selling their currency and forcing their market interest rates up. Any such forced adjustment would be brutal. Interest rates would skyrocket. Imports would become very expensive or simply impossible for most to afford. Unemployment would skyrocket. The economy would crater.
This is not going to go away when the global economy rebounds. It’s time to be realistic about the global economy and the way it has boomed for the last five years. That boom was also unsustainable. At least New Zealanders were not alone in borrowing and spending too much. Americans, Australians, Britons, Spanish people, Irish people and Icelandic people all did the same.
Now this model of western consumers borrowing from cashed-up Chinese and Middle Eastern governments to buy Chinese and European imports is broken. The financial system that supported this model broke on September 15 last year when Lehman Brothers collapsed. The scale of the debt created by that system was absolutely enormous. It will take more than a decade to wind down. That process of winding down the debt or “de-leveraging” has already destroyed the value of shares and houses globally. However, this process has only just begun.
The former chairman of the Federal Reserve, the 82-year-old Paul Volcker, says the economy is slowing faster than it did at the start of the great Depression. Renowned investor George Soros says there is no end in sight to this financial crisis. The NZ Institute says we are vulnerable to a foreign investment freeze that could drive our unemployment rate to 11.2%.
We cannot let this happen. We simply have to spend less, save more and invest more. This is easy to say. It is harder to do.
That’s why we must all accept something completely foreign to all of us and to politicians in particular. We must accept a lower standard of living. (Pause for effect)(Wait for applause)(Start speaking again after uncomfortable silence.)
We must accept that we cannot just consume what we’d like to have or think we need to have. Those days are over for both consumers and politicians. We can’t afford any more monuments to politicians. We can’t afford to build empires inside our departments. We can’t afford to pay David Beckham millions to play soccer in front of a half-empty stadium. We can’t afford many things.
So it means we must cut out the unnecessary things from our private and public lives.
We must first ensure that the poorest and most vulnerable in our society are healthy and safe. We must ensure we invest in our human and physical infrastructure to make sure we can grow strongly when this long recession ends. That means investing in schools, in health services, in roads and in broadband. We must invest in public assets that will keep generating essential public services for decades to come. The private sector must invest in private assets that generate goods and services for decades to come. The poorest kids should not be hungry or sick. They should get a great education so they can contribute when we recover.
We all must do everything to ensure that public and private investment happens. That means removing roadblocks to investment. It means changing the way we think. We must think now about the long-term future. We must think about making sure our children and grandchildren have the tools they need to succeed. That means taxpayers and workers must spend less and save more now. That means the government will have to hand out less money for people to consume things and instead use that money to invest and to save.
But “we the public” is wider than just the government. It means “we” as consumers and taxpayers.
“We” as citizens cannot afford these tax cuts that we promised before the election. I’m sorry. National was wrong. I was wrong. I thought we could afford them, but we can’t.
We consumers can’t afford to buy new cars and flat-screen televisions and all the unnecessary things of the modern age. Ask yourself before every purchase: Do I really need this? Do we need fancy overseas holidays? Do we need brand new clothes? Do we need all of these imported consumer goods that we can’t afford? Do we really need another flat white and another biscotti? Can we live without it? We all might be surprised how much we can live without. We might even find we enjoy it more.
This government is now going through its budget line by line to weed out any hint of unnecessary spending. The nation should do the same.
I ask you now to go home and do a personal budget. The best way to do it is to look at the outgoings every month from your bank account and the income into your bank account. Do they match? Are you finding yourself spending more than you earn? If you are then you need to stop right now.
Once we’ve spent less we’ll find we have some spare cash. When that happens, the first thing we should do is repay debt. Don’t muck around. Pay off the credit card. Pay off the car. Pay off the fridge. Pay off the mortgage. Just get rid of the debt. If you don’t, someone else will.
New Zealand’s governments of the last 20 years managed to reduce its debt to almost nothing. It can afford to increase it slightly, but only for investment in productive assets. We can’t afford to hand over money to taxpayers to simply spend it on more consumption. There are no easy fixes. We cannot tiptoe out of the room and hope the ceiling doesn’t collapse. It already has.
We must instead invest this money in assets our children can use and avoid building a mountain of debt that our grandchildren will have to pay off.
I know this is a bit of a shock. I didn’t talk about this before the election. But to be frank, I was a lot like everyone else. I didn’t realise the depth and the scale of the problem. I do now.
I hate disappointing people and saying no to requests to do more, to give more and to spend more. I’m more of a “Yes we can” kind of guy. But sometimes the right thing is to do is to say “No we shouldn’t,” “No we can’t,” ”We can’t do it that way any more.”
In fact it’s a different kind of “Yes we can”. Yes we can dig ourselves out of this hole. Yes we can avoid bankrupting the generations to follow. Yes we can save more. Yes we can invest.
Yes we can get by with less.
Because we have to.
The blogosphere will miss your wisdom Mr Hickey.