December 23rd, 2008

If you’re holding NZD, know that the scheme relies heavily on two factors:

1) The price of milk. Milk solids, actually. That’s right. If milk solids tank, watch out.

2) Japanese carry trade investors. High dairy prices are part of the reason why the New Zealand Dollar is an attractive carry trade destination for Japanese retirees; who make next to nothing on their cash savings in Japan. Whether the Japanese realize that they’re rolling the dice on the price of milk, or not, doesn’t matter. It’s the price of milk that’s allowing the New Zealand government to keep the Ponzi scheme (carry trade) going.

The bottom line is that if dairy prices fall, the Japanese will pull their money and, well, “Bob’s your uncle,” as they say down here.

Milk It: Fonterra Dairy Exports Rise to Quarter of New Zealand’s National Total

Privately, with friends and family, I’ve been referring to New Zealand as Iceland 2. The financial situation here is not quite as absurd as Iceland’s, but the comparison is legitimate because of New Zealand’s extremely high debt load.

In collapse, New Zealand might get a chance to behave appropriately, and serve as the positive example that it could have been serving as for a long time, but didn’t. New Zealand had everything going for it, but the crooked corporations, and the politicians that serve them, have totally, utterly blown it.

No surprises here. Not to Cryptogon readers, anyway, or to the handful of Kiwis who have been paying attention.

Also, does the the Federal Reserve and Reserve Bank currency swapline situation make more sense now? I think it does.

Via: National Business Review:

Economists are warning that an adjustment in New Zealand’s current account is imminent, and if not carried out voluntarily it will be forced on the country.

Figures out from Statistics New Zealand (SNZ) today show the current account deficit was $6 billion in the September quarter.

The current account, also known as the balance of payments, measures all of New Zealand’s transactions with the outside world.

The annual deficit was $15.5b, which was 8.6 percent of gross domestic product, up from 8.4 percent of GDP in the June year and 8 percent in the March quarter.

“Given the credit-centric nature of the shock facing the global economy, New Zealand’s current account cannot continue its current trajectory,” ANZ bank said after the release of today’s data.

“An adjustment is imminent, either undertaken voluntarily or forced up on it externally.”

The deterioration in the annual balance was entirely due to a growing goods and services deficit, which rose in annual terms from $2b to $2.7b.

The investment income balance improved slightly courtesy of a fall in profitability of foreign firms operating in this country.

While an improvement in the seasonally adjusted deficit was encouraging, much of the improvement could be put down to the lagged effect of high commodity prices, ANZ said.

Seasonally adjusted, the September quarter deficit was $4.1b, $571 million smaller than the June quarter deficit.

With this country’s main commodity prices falling, any improvement in the trade balance would rely on a sharp fall off in import volumes, ANZ said.

“Years of imbalanced growth have resulted in a ballooning current account deficit, which by definition means we are spending much more than we save as a nation.”

Running large current account deficits was not an issue in an environment where credit was cheap and abundant, as was the case in the first part of the decade.

But the economy was now in a more vulnerable position, with credit much more expensive and difficult to come by.

Typically, a current account adjustment had two distinct dynamics — a period of weak activity in the domestic economy, and a depreciating currency.

“Both of these dynamics have already begun, but considering the large starting position for the external balance, and the worst credit shock in 80 years, there is still some way to go yet.”

During the September quarter, New Zealand’s investment income deficit shrunk by $396m to $3.2b.

ASB economists said the investment income deficit was by far the biggest component of the current account, so a nascent turning was positive, even if much of the cause of it was a weak domestic economy.

The weakening domestic economy was starting to have an impact on the equity earnings going to foreign owners of New Zealand corporates, somewhat perversely helping in containing the deficit.

Income paid out to foreign creditors did increase moderately relative to a year ago, but with interest rates now falling that component of the current account would increasingly become less of a drag than during the interest rate tightening cycle.

Private sector debt accumulation would be modest, although sovereign debt issuance was set to increase.


  1. Aaron Says:

    This raises a few questions,

    Like how sustainable are current food prices? how much is due to a genuine ‘peak food’and how much due to speculation? Given that food is the last thing people stop buying in a depression we may have better export potential than Iceland (what do they export anyway?). Also given that the result ot the economic collapse will be to stop most other forms of industry the demand destruction may well keep the cost of exporting low (principally oil costs).

    I’m not suggesting that we’re going to be alright – only that NZ may be able to keep this game running a bit longer than we might expect – it is of course only a matter of time before the stupidty of importing more than we export catches up with us. I will get miminal happiness out of being able to say I told you so to people who thought that seeling off all those state-owned-assets in the 80s, and letting billions of dollars in profits go oversease every year, was a good idea.

    Here’s another question, if the dollar drops further that will serve only to increase the money we get for our exports – so will that also help prop us up a while longer?

    This whole business is kind of complex. We know all the trains are going to crash but it’s so hard figuring out which one will be the slowest and gentlest trainwreck (cos that’s the one we want to be hitched to).

  2. tochigi Says:

    I have to slightly disagree with you here, Aaron.
    I don’t think it is particularly complicated.

    In general, the productive sectors of the NZ economy, excluding dairy, have not performed very well over the last 15 years, IMO.
    By “productive sectors” I mean stuff that is producing actual value, not property development scams, house price bubbles or other such pyramid schemes.
    As for the dairy sector, this is part pyramid scheme, part environmental looting (“discounting the future”) on a massive scale. Of course, the boom-cycle dairy prices were never going to be sustainable over the long-term for two reasons:
    (1) collapse of the globalization bubble would massively deflate overseas demand for dairy products, especially in newly industrialising countries; and
    (2) soil and water resource degradation in NZ (as well as the costs associated with factory farming practices on animal health) would eventually make the exponential growth in dairy solids output impossible and cause a reversal in output volumes.
    At any rate, despite the high returns on milk solids over the last five years, the current account deficit has continued to spiral out of control. There seems to be two main causes:
    (1) a massive fire sale of public and private productive assets in NZ over the last 23 years, meaning many natural monopolies were handed over to overseas interests only interested in repatriating as much “profit” as possible in the form of dividends, followed by asset stripping and finally resale to duped NZ public or private interests. This pattern is long proven across many sectors.
    (2) the Reserve Bank has consistently, for two decades, propped NZ interest rates up well above those of other OECD countries. This has had huge downstream effects over a long period. Productive sectors have been hugely handicapped (kneecapped?) vis-à-vis overseas rivals. But scam pyramid-scheme sectors have had a very long party, which was only called off because the late-arrival partygoers began to realize they had been tricked into believing their entry fee would make them rich like all those other pricks. Anyway, Australian-owned NZ banks all borrowed huge sums on overseas bond markets and the like (uridashi, Eurokiwi, etc.) which was then used to create the largest real estate bubble in NZ history. The ratio of median income to median house price became a joke. But people who sold at a profit or withdrew home equity through dumb mortgages fuelled lots of spending—particularly on imported stuff and overseas holidays. And lots of productive jobs were killed off and replaced by pyramid-scheme jobs. You know, all those real estate agents and mortgage brokers, blah, blah, blah. And this drove up the current account deficit ever higher, until…
    Well, until the foreign creditors want all their money back (cf. Iceland) and suddenly the money is nowhere to be found. But of course the Labour (sic) govt. was being so “prudent” by not wanting to upset the party people. Yeah, right.

    To summarise in a few words: money for nothing? If it sounds too good to be true, it’s probably a big lie. As in “The Emporer’s New Clothes”. As long as no one points out the obvious, there’s no need to worry!


  3. Aaron Says:

    tochigi, you’re right it’s obvious it’s all going to come crashing down – the bit I find hard to predict is WHEN is it going to come crashing down? The alternative media in this country is not as useful as the one in the US with the likes of Mike Whitney doing awesome reporting and analysis. In fact I’d say Kevin is pretty much all we’ve got in this area. I used to run an ‘alternative (I hate that word but it’ll do for now) radio news show and I’ve asked around people I know but there isn’t anyone else prepared to go really deep on this stuff.

    You mentioned the Labour Government being prudent, I think they had no choice in the matter. You might remember when Labour first came to power in 99 there was a panic in the business press about how Labour would surely mismanage the economy. Anyway the PM and a few others went for a private meeting with the Business Roundtable. No one knows what happened in that meeting but it’s pretty clear they agreed to a few policy changes (for example a reversal on GE) and wouldn’t you know it, the business press went all quiet on the ‘Labour is bad for business’ headlines.

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