Time for a Spend Up

Five years ago Lehman Bros Investment bank was bankrupted.  It marked a critical time for world wide financial crises.  Country after country was brought to its knees because US debt products had failed and availability for credit from banks became scarce.  People like Ben Bernanke of the US Federal Reserve were thankfully students of the previous world wide cataclysm – the great depression.

As we approach Christmas and enjoy the camaraderie of social occasion and the sharing of gifts we should be grateful to men like Bernanke and our own Bill English.  Borrowing money (NZ $65 billion) and printing money (quantitative easing - $85 billion per month) has kept the countries liquid.  Money was made available for banks to lend, employment to be maintained, industry to prevail and for agriculture to prosper.  That did not occur in the 1930s – the opposite in fact.  Trade came to a halt and US became insulated and isolated.  World War II ‘came to the rescue’ - as the productivity and employment of war provided impetus to Western Nations.  Including NZ.  The depression marked the emergence of our first Labour government and initiated work schemes, building projects and welfarism as we know them today.

It is always easy to criticise politicians whether local or afar when they are required to adjust or adapt to critical financial circumstance.  For NZ to be expected to build to 3.8% GDP in 2014 and to balance the budget around the same time is a truly creditable achievement.  Whilst we might be in debt to the tune of $70/$80 billion – you can continue to buy Christmas presents from Lambton Quay or The Warehouse because the government has kept us liquid and therefore productive.  That was not the case in the 1930s.  I know which strategy I prefer – and whilst capitalism has its critics – once again it has come through vs. the national socialism of Nazi Germany or communist socialism of the Soviet Union or the dictatorial hegemony of North Korea.

As I ponder the debt outcome that is the result of quantitative easing and NZ offshore borrowing – it is cognisant to consider repayment.  Of course with a balanced budget, then a surplus budget it is no different to repaying house hold debt – one big difference however, the time frame.  As individuals we consider retirement and therefore the reduction of earned income – as a country we will continue to earn as long as we can grow GDP.  There is no restriction of earning power and time.  That’s the exciting thing about a 3.8% GDP and if and when the US commences its pull back on QE, we (NZ) would expect a decline in the value of our dollar.  Whilst that won’t make the importers happy – our exporters are sure to be smiling.  Another aspect of borrowing which continues to interest me is, the confidence of the lender.  China is lending to US in huge amounts – if there was a possibility of default would that lending continue – I doubt it.  Both US and NZ retain a credible capability for debt repayment directly because our capacity to produce has continued.

When we sing Christmas carols and prepare for another festive season spare a thought for the politicians we so often condemn.  I think they got it right this time and perhaps the next generation of savers and investors will be spared the biases and beliefs which came out of the great depression which so influenced where and how people have invested for the last 65 years.  I’ve spent the best part of 40 years attempting to educate and correct those biases and beliefs passed on to people of my generation.  It is almost impossible to change the thinking of people 65+, they are scripted and scarred.  Thank goodness for Google, Wikipedia and Social Media – the new generation want facts and they go find them, themselves.  The only problem is they will probably continue to engage in social media at the dinner table when the rest of us are singing Christmas carols and eating our Christmas pud.  Merry Christmas.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.