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NZ current account deficit widens less than expected to 4.9% of GDP in year to June; Nears 5% tipping point into ‘danger zone’

NZ current account deficit widens less than expected to 4.9% of GDP in year to June; Nears 5% tipping point into ‘danger zone’

By Alex Tarrant

New Zealand’s current account deficit widened in the three months to June from March, but not to the proportion of the economy expected by economists as revisions to previous quarters worked in its favour, figures released by Statistics New Zealand show.

It is still just below the 5% mark for ‘the danger zone’, a point at which ANZ economists say international creditors will take much more notice of the economy’s external liabilities.

The current account deficit came in at 4.9% of GDP in the year to June from a revised 4.5% (down from 4.8%) in the year to March.

The median market expectation had been for a current account deficit reading of 5.2% of GDP. 

The New Zealand dollar rose slightly after the 10:45 am release, by about 25 basis points to 82.8 US cents at 11:20 am. 

The deficit widened during the June quarter primarily because foreign-owned companies in New Zealand – namely the big four banks – earned, and paid out, more in profits via dividends to their parents than in the March quarter.

Following the figures, ASB economists said they expected the current account deficit to widen over the next year to 6.5% if GDP before narrowing from 2014 as New Zealand's trade of goods and services started to strengthen. They didn't expect credit rating agencies would be any more worried about New Zealand's external vulnerabilities after the release than before it.

ANZ economists noted the actual, unadjusted, current account deficit in the June quarter of NZ$1.8 billion was higher than market expectations of NZ$1.6 billion. However, revisions to previous quarters meant the headline figure of the annual deficit being 4.9% of GDP was lower than the 5.2% expected.

ANZ economists said they expected future annual deficits would be capped below 6% of GDP.

Westpac economists said they expect the investment income deficit - which makes up for the majority of the current account deficit - to widen further over the next couple of years as the domestic economy improved, boosting the profitability of both New Zealand and foreign-owned firms.

Westpac economists said they expected the current account deficit to head back to the 6.5% region by late 2013.

Deficit requires foreign funds

The current account balance represents a net of New Zealand’s exports and imports of goods and services, as well as income flows like dividends, and other transfers with the rest of the world. A deficit represents a shortfall in New Zealand savings to fund its investment needs, which is made up for with overseas borrowing.

In June, while commenting on the March quarter current account figures, ANZ economists said a deficit of 5% of GDP was a level regarded as a tipping point into the “danger zone” for a country’s external accounts. ASB economists said in June that the March quarter figures showed New Zealand was “still vulnerable to the whims of its creditors.”

The Reserve Bank’s latest projections, in its September quarter Monetary Policy Statement, show it expects the current account deficit to widen to 5.7% of GDP in the year to March 2014, before narrowing again to 5.2% of GDP by March 2015 as both the household savings rate and terms of trade turn positive.

Treasury’s latest public projections, in its May Budget, show it expects the current account deficit to continue widening to 6.7% of GDP by March 2016.

Credit ratings agency Standard and Poor’s warned in August that pressure on New Zealand’s credit rating would emerge if its external accounts kept deteriorating. In September last year, after downgrading NZ’s credit rating a notch to AA, S&P said New Zealand would need sustained current account surpluses for there to be upward pressure on the rating.

And just this week, JBWere economist Bernard Doyle warned New Zealand’s widening current account deficit would not be as readily accepted by the rest of the world as before the global financial crisis.

The current account deficit grew during the 2000s to over 8% of GDP between December 2005 and March 2009, peaking at 8.9% of GDP in December 2008, before falling away to as small as 1.8% of  GDP in March 2010 as the global financial crisis hit the income outflows of foreign-owned New Zealand companies.

Keeping out of the danger zone

Figures released by Statistics New Zealand on Wednesday morning showed New Zealand recorded a seasonally adjusted current account deficit of NZ$2.9 billion in the June quarter. This was NZ$0.3 billion larger than the March quarter deficit, Stats NZ said.

The larger quarterly deficit was due to higher profits earned by foreign-owned banks.

“Overall, when compared with the latest quarter, more profits were paid out as dividends instead of being reinvested in New Zealand,” Stats NZ balance of payments manager John Morris said.

This was captured in New Zealand’s income deficit, which widened by NZ$511 million in the June quarter from March to NZ$2.8 billion as foreign investors earned more from their New Zealand investments.

“Profits earned by foreign-owned companies increased, mostly in the banking sector. While a similar amount was reinvested in New Zealand when compared with the March 2012 quarter, a greater proportion of dividends was paid out overall,” Stats NZ said.

In the year to June 2012, New Zealand’s unadjusted current account deficit was NZ$10.1 billion, or 4.9% of GDP. This compared to a deficit of NZ$7.4 billion (3.8% of GDP) in the year to June 2011.

“The larger annual deficit was mainly due to increased imports of goods over the year, as prices for petroleum and petroleum products rose. Foreign-owned banks also made higher profits over the year,” Stats NZ said.

The quarterly deficit was funded by a net inflow of foreign investment as foreign investors continued to purchase New Zealand government bonds, and banks received deposits from overseas, Stats NZ said.

“The net inflow of foreign investment was the main reason for the increase in New Zealand’s net international liability position, which was NZ$148.6 billion (72.6% of GDP) at 30 June 2012, up from NZ$145.6 billion (71.9% of GDP) at 31 March 2012,” Stats NZ said.

Economist reaction:

ASB:

The annual deficit, at 4.9%, of GDP, was smaller than our and market forecasts of 5.2% of GDP.  The unadjusted quarterly deficit of $1.8 billion was slightly larger than the $1.6 billion we and the consensus expected.  However, Q1 was revised to a smaller deficit, leaving the overall annual deficit lower.

More comprehensive coverage of services trade has lifted both exports and imports of services, but exports more so.  These revisions were the main reason for the change to the Q1 deficit.  They will also make for a slightly higher services balance going forward on a sustained basis, relative to prior expectations (all other things equal).

The larger than expected Q2 deficit was due to a greater than expected outflow of investment income.  In particular, StatsNZ noted higher profits earned on foreign owned NZ companies.  Over the first half of 2012 the NZ domestic economy has shown signs of improvement, reflected in the pick-up in housing demand and retail spending.  As this gradual improvement in domestic activity continues, we can expect profit outflows are likely to continue to underpin NZ’s current account deficit.

The seasonally-adjusted traded goods balance was in surplus as expected following the released of detailed trade data earlier this month (see release here).  However, over the coming year these surpluses will ease as New Zealand’s export commodity prices decline and import demand continues to recover.  However, a recovery in global food prices over 2013 is likely to see some recovery in NZ’s Terms of Trade and will limit the extent of future trade deficits.

The seasonally-adjusted services deficit remained unchanged over the quarter.  Over the quarter spending by overseas visitors declined due to lower average spend per visitor reflecting shorter stays over Q2.  Meanwhile, Stats NZ noted that over the past year the production of a number of films in NZ (including the Hobbit) have contributed to an increase in exports of services.  

The net international debt position increased to 72.6% of GDP over the quarter, up from 71.6% of GDP.   The increase in the net debt position largely came from the government sector, while the banking sector saw a small decline in its net debt position.  

The outstanding earthquake reinsurance claims still mask the extent of our net debt position.   External earthquake reinsurance claims have been revised up by $2.2 billion to a total of $17.9 billion.  Of these, $12.8 billion of these are yet to be settled.   Excluding outstanding reinsurance claims, New Zealand’s net debt position would be 78.9% of GDP.

Implications

Overall the current account outcome was a mild positive through the smaller than expected annual deficit, as Q1 revisions more than offset the slightly larger than expected Q2 deficit.  However, we do expect the deficit will widen further over the next year to 6.5% of GDP.  The impact of the past decline in commodity prices is starting to work its way through the trade balance and ongoing recovery in the economy will lift the outflow of investment come.  Heading into 2014, we expect goods and services trade to strengthen and start reducing the deficit.

A wider deficit over the next year will highlight NZ’s vulnerability to external financing.  However, gradual rebalancing of the economy is taking place.  The private sector (via the financial system) is gradually reducing its net foreign debt.  The Government is still increasing its use of foreign debt, but that will also change in the long term once budget surpluses are eventually restored.  We don’t expect rating agencies to be any more worried about NZ’s vulnerabilities after the current account release.

ANZ:

IMPLICATIONS 

Today’s quarterly current account deficit was higher than market expectations, although upward statistical revisions to the services balance helped keep the annual deficit below 5 percent of GDP.

There are limited immediate market implications from today’s release. Over the past few years, a positive goods balance has tended to counteract the large invisibles deficit, but the camouflage appears to be wearing thin.

The terms of trade are now past their peaks, the higher import intensity of (recovering) investment and there is limited margin to boost primary production in the short-term.  

Although the annual deficit has remained below the 5 percent plus “watch zone”, the focus remains the trajectory of the current account deficit. We (and the RBNZ) expect future deficits to be capped at around 6 percent of GDP by structural public and private sector deleveraging and a lift in export commodity prices from early next year.

However, this depends crucially on borrowers showing ongoing restraint, with consumer spending making way to facilitate the Canterbury rebuild.

Considerable tensions lie ahead given the fickle global scene, the high NZD and the higher import intensity of the foreshadowed lift in investment activity. The recent lift in the GlobalDairyTrade auction has been encouraging, suggesting demand may provide more of a floor to export prices and a ceiling in the current account deficit. This will help, but improving export sector performance will depend on trading partner demand holding up, and the lower NZD acting as a safety valve.

Historically low interest rates are likely to help mitigate our debt servicing burden and help at the margin.

Westpac

New Zealand’s annual current account deficit widened to 4.9%, less than expected, in part thanks to upward revisions to previous quarters. The detail of the release was broadly as anticipated. The goods balance improved slightly in the quarter (in seasonally adjusted terms) but remains much lower than a year ago, as deteriorating external conditions weigh on exporters and imports continue to pick up. While the services deficit narrowed marginally, it remains stuck firmly in negative territory. The biggest surprise relative to our forecast was a larger investment income balance. Instead of remaining relatively flat it widened significantly, driven by increased earnings by foreign owned firms.

New Zealand’s current account deficit has now widened significantly from a recent low of 1.8% of GDP in March 2010 and we expect the gap to widen further yet. Despite the emergence of more positive signs for key New Zealand dairy export prices of late (we had the fourth consecutive rise in international dairy prices in last night’s GlobalDairyTrade auction), for now external conditions remain challenging for exporters. In addition the high NZD dollar is depressing exporters’ returns while at the same time making imported goods and services an attractive option. Lastly, the investment income balance is set to widen further over the next couple of years as the domestic economy improves and boosts profitability of both New Zealand and foreign-owned firm. That should see the current account deficit to be heading back into the region of 6.5% late next year. While this would still be well short of the 8.9% peak we saw in 2008, it would still be relatively high by international standards.

But even with such an outlook, and against an international backdrop where imbalances in some countries are coming under intense scrutiny from markets, there are no signs yet that New Zealand’s growing imbalances are facing the same harsh glare. That said, the simple fact is that the larger the current account, the more reliant New Zealand is on foreign savings. A long period of low interest rates risks exacerbating these imbalances.

Detail 
Both exports and imports of good (in seasonally adjusted terms) fell in the June quarter. Once again a feature was softer prices and volumes for dairy exports. On the imports side of the ledger, lumpiness in oil import volumes helped push imports lower. While the goods balance remains in positive territory for now, it is well down on levels of a year ago.

The services balance remains firmly entrenched in deficit territory (though it was upwardly revised following the incorporation of additional data from the Census of International Trade in Services and Royalties). The high exchange rate continues to weigh on spending by overseas visitors, while at the same time making holidays abroad attractive for New Zealanders. On a more positive note, New Zealand’s film industry is providing a boost to exports of services with a number of movies produced in the country over the last year, including the big budget film, The Hobbit.

The income deficit grew in the June quarter as profits of overseas-owned firms increased. As we noted above, we would expect further widening in the investment income balance over the coming years as stronger growth in New Zealand’s domestic economy is eventually reflected in improved profitability of both foreign- and domestically owned firms.

In today’s release, Stats NZ revised up its estimates of reinsurance claims relating to the Canterbury earthquakes after capturing more firms in its surveys. It now estimates total international reinsurance claims from the quakes at $17.9bn ($2.2bn higher than their previous estimate) of total claims. $5.1bn of claims with reinsurers had been settled by the end of June.  The remaining $12.8bn of outstanding claims continues to flatter New Zealand’s Net International Investment Position. Excluding these reinsurance claims, New Zealand’s Net International Investment Position was 78.9% of GDP in the June quarter, compared to 72.6% of GDP when outstanding reinsurance claims are included.

Balance of payments ratios

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26 Comments

"The quarterly deficit was funded by a net inflow of foreign investment as foreign investors continued to purchase New Zealand government bonds, and banks received deposits from overseas, Stats NZ said"

 

Foreign investment? Call it what it is - we are borrowing to pay our interest bill. The only reason these figures are "better than expected" is the lower than expected interest rates we are paying to our foreign owners. The current account deficit is really a measure of wealth loss from us to foreigners, that's $10,100,000,000 in the last 12 months. Or about $6,100 per household. Nice!  

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We're just working our way to becoming the worlds Primary Reserve Currency..Kiwidave

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Now that was good for a giggle. Well done.

 

Edit: To put another perspective on that figure, every household actually earnt $6100 less that they thought they did in the last year. Plus interest of course, compounding as well.

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We are borrowing to pay for the increased government " services " , and for the idiotic vote buying bribes of the previous government , which the current government hasn't got the balls to repeal ...

 

...... NZ is living beyond it's means . Both the Clark & the Key governments have infantalised the population . Individuals are no longer independent of Nanny State ....

 

We are soft , we are mush and flabby ...... the Chinese will clean us out ..

 

..... have a nice day !                   :-)

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Much of the culprit is the increased profitabilty of our Australian-owned banks, plus rises in the price of petrol.  So... a few obvious solutions to systemically reverse this:

Increase the tax on petrol, to match the levels of other OECD countries.  This would encourage more economical driving habits, & reduce petrol imports.  It would also reduce the need for govt overseas borrowing

Put a capital gains tax on the sale of property.  This would reduce the addiction to property, which is fuelled by debt from overseas banks, increasing their profitability & our overseas debt.  Plus reduces the need for govt borrowing.

No sign of govt introducing either of these.  Why not, I wonder?

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That is because Petrol is still cheap. If the price got high enough then I'm sure we'd be seeing more 'fat trimmed off' in regards to driving. With ~ half of all commutes in NZ being less than 5km I imagine a lot of people could manage to drive a lot less if the incentive or will was present.

 

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Look at the burgeoning numbers of SUVs & suchlike, dropping kids to school & doing the shopping.  Its crazy for so many reasons.  If petrol was (say) $2.50, the message would be given - get a small car.  We have a Corolla, we use it to tour the South Island, tow a trailor for firewood etc. 

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CGT has not reduced the addiction to property in other countries around the world , not one iota ..... a land tax may redress the balance somewhat ....

 

CGT has enriched accountants & tax planners ! ...... if you wanna help them out , go hard ...

 

..... as Hugh P. has said many times : Release land for development , get the government & the local councils out of the way ..... then you'll see some progress , house supply increased , and  section prices plummeting ....

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Hi Philly, I'd prefer to see:

- A number of the smalller NZ banks & buidling societies to amalgamate to provide some serious competition to the 4 main Aussie banks

- Tolls which are aimed at the peak congestion (i.e no off peak tolls). The petrol tax in NZ pretty much covers the governments capital & maintenance expenditure on the transport system (i.e user pays), although you could argue that it should be increased further to replace rates expenditure on transport.  Any excess tax on petrol is a drag on the economy.

- Have the Reserve Bank manage the maximum Loan to value ratio on new housing mortgages alongside the OCR

- Have the Reserve Bank manage the upper limit on the 12 month rolling migration rate so the housing market has time to respond to migration.  House prices in NZ move the most when inward migration is highest as the market is so small.

- Force local & regional government to zone & stage urban land supply out to the planning horizon instead of bidding up land prices

- Have compulsory saving in NZ (spend less save more).  The amount of compulsion could be managed through how much tax is paid on interest bearing income. Maybe we could save enough to buy the banks  :)

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hi ostrich, yep fair enough.  - have put in not to the proportion of the economy as expected.

Stats told us at the lock up they're trying to get better info on derivatives for the financial account. So it's a wait and see game I guess.

Cheers

Alex

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Don't ya think it a bit facinating Alex .. .?, ...that it's a  "wait n see " game I mean.....Is that not the Mantra from the top down......?

Wait n see, n wait n see some more, then you need to see more of what you waited to see more of ....see....ahh no wait, ..wait n see n wait some more, then see, then wait for what you saw to be sure you see...see you dirty rat you killed my brother see...ah no that's somebody else.

Macroeconomics is really hard isn't it..!

Bloody good work BTW Ostrich

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They never will. They invented the current USD so they didn't have to. By going off the gold standard they can import commodities and products from the rest of the world in return for their increasingly worthless money. That is what empires do, suck resources from the periphery. The current method is just about to the end of its usefulness, just wait until you see the next version as it is going to be a beauty. 

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Indeed, although they played a clever hand at times. Kissinger pegging the oil price to the USD back in the early '70's, was genius.

 

But it was - as you say - about sucking resources from the periphery too.

 

That debt can't be inflated or QE'd away, nor can it be addressed. So there must be a default. The world can absorb the default of the odd Latin-American country - but the biggest player? And while everyone else is in trouble too?

 

War it will be. The face-saving way out.

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Nicely put. The book "Mao, the Unknown Story" paints Kissenger as a fool, but I don't think that analysis is correct. The last 40 years is testament to that. While the empire is past its' peak, I don't think it is a done dog yet. TPP will ensure our contribution will be made to keeping it going.

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Chuckle. I was sitting within 2 metres of my copy on the bookshelf, as your post came up. Kissinger made some bloopers, but he was an intellect, no question.

 

As to the Empire, yes, it has a way to go. Debt is not their problem, armed as they are in current relative terms. Their ultimate undoing will be the decay-rate of their infrastructure (they're just a bit older in every way than us).  Things like bridges are showing up now, and no hope of replacement, merely triage. Dams, sewers, they'll be flat-out holding it together.

 

Whether China can get to be as powerful is an interesting question: militarily possibly. In terms of growing a middle-class, they can't. The planet is struggling with perhaps 2 billion middle-classers now - it's not going to carry another 3.6. It wouldn't even carry the 3.6 if the 2 billion got taken out.

 

Which leaves the Chinese leadership in the same place as the American leadership - unabe to substantiate the expectation. They have one long-term advantage - they haven't lost the ability to exist in a powered-down state. It won't be enough - they've shat in their own nest something shocking - but its a start.

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4.9% sounds pretty close to 5%  to me and the trend is up.

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Has the NZ government finances ever been this badly managed?
The tax cut spending spree has been exposed for the biggest and most cynical bribe this country has ever experienced.

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Philthy - Most Income tax cuts were offset by the rise in GST.  In fact most people pay more overall tax than what they previously paid. If rates, RUC, levies, etc are included these have all increased significantly. So I don't believe the cut spending spree as you called it is the problem.

 

To fix the current account deficit we basically need more products exported and less imports.

 

Govt spending needs to reduce and the private sector expanded to be in a position to be able to grow exportable products. The taxes taken from the private sector is not able to be put back into producing exportable products and is instead spent on public services.

 

 

 

 

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The government politicians spun that their tax cuts for themselves and their mates would be offset by gst.

The optimistic treasury figures at the time showed a $1 billion loss in tax revenue over 4 years.

The reality is that the loss in tax revenue is greater than that as the reduced income tax is not going on spending with gst attached, but into saving/debt reduction (like I am doing).

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 Well that's the government spin on it anyway, I think you'll find it was actually about 2 billion drop in government revenue because of it.

Only a few years ago before National came into power, the government was running record surpluses, so go figure.

 They've cut just spending on just about everything except for the extravagant new roading plans for Auckland, so nothing for it but to cut those now too.

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It is still just below the 5% mark for ‘the danger zone’, a point at which ANZ economists say international creditors will take much more notice of the economy’s external liabilities.

Suspicions are in the present 1/4 we have alrady passed the metric due to

i) The high TWI that has reduced the export value returns of exporters.

ii) The decrease in capital flows  from SOE due to a constrained economy,and the inverse relationship from increased charges such as rachet forced electricity increases.

iii) The divergence of the trade economy from the price forced global economy as evident in the export receipts.

iv) The increase in the slowdown of the productive economy such as exporters and manufacturers due to import substituion.

One of the main reasons for an open currency is that it would fluctuate to reflect the real prices for international trade,ie it would synchronise (mode lock in phase) the system to capture the real cost of production and returns.

Unfortunately at present there is a substantive divergence ie the system is modelocked in an antiphase relationship ,This reduces the ability of say the dairy industry to capture price increases,and defend price decreases through product innovation etc.

Tipping points (bifurcations) are very real properties of any dynamic system, whether we have crossed the threshold is an arbitrary point, that needs some reflection.eg Robert May 2008.

‘Tipping points’, ‘thresholds and breakpoints’,‘regime shifts’ — all are terms that describe the flip of a complex dynamical system from one state to another. For banking and other financial institutions, the Wall Street Crash of 1929 and the Great Depression epitomize such an event. These days, the increasingly complicated and globally interlinked financial markets are no less immune to such system-wide (systemic) threats. Who knows, for instance, how the present concern over sub-prime loans will pan out?

Well before this recent crisis emerged, the US National Academies/National Research
Council and the Federal Reserve Bank of New York collaborated1 on an initiative to “stimulate fresh thinking on systemic risk”. The main event was a high-level conference held in May 2006, which brought together experts from various backgrounds to explore parallels between systemic risk in the financial sector and in selected domains in engineering, ecology and other fields of science. The resulting report1 was published late last year and makes stimulating reading.

Catastrophic changes in the overall state of a system can ultimately derive from how it is
organized — from feedback mechanisms within it, and from linkages that are latent and often unrecognized. The change may be initiated by some obvious external event, such as a war, but is more usually triggered by a seemingly minor happenstance or even an unsubstantial rumour. Once set in motion, however, such changes can become explosive and afterwards will typically exhibit some form of hysteresis, such that recovery is much slower than the collapse. In extreme cases, the changes may be irreversible.

it is for this very reason we need a more substantive cross party debate,without the ideological discourse from all sides.
 

 

 

 

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Very good, bifurcations makes for some nice academic speak. Take that idea of tipping point and reference it to the visual or mathematical representation known as an inflection point. Look at the inflection point that occurred in 1961 on a world population graph and tell me what you can infer from that. Perhaps take a look at a Seneca Curve as a cross reference.

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Long waves (supercycles) such as your malthus problem,are some times interelated and sometimes not as Kondratiev colleague Slutsky suggested.

The summation of random causes generates a cyclical series which
tends to imitate for a number of cycles a harmonic series of a relatively
small number of sine curves. After a more or less considerable number of
periods every regime becomes disarranged, the transition to another regime
occurring sometimes rather gradually, sometimes more or less abruptly,
around certain critical points.

The proposition  the summation of random causes might generate wave-like phenomena, i.e. that mutually independent chance events might conjoin together to produce an oscillatory appearance in some aspect of reality that was represented in a time series-like fashion (Barnett 2006)  and modelocking is an indeterminent property,that is often overlooked by analysts and policy advisors.

The problem from the NZ position,is that there is instability in the NZ economy,some forced by externals such as the higher then fundamentals of the NZ$,that destabilzes productive investment and employment opportunity and transfers the gains from a lower interest regime to the unproductive ( AK  housing bubble) and increasing household debt and some internal such as poorly thought out policy initiatives ( with poorly defined qualitative outcomes) such as public service restructuring and its destabalizing effect on the Wgtn economy.

Where we are at present is  subjective to your POV.

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I agree on the internal policy, but I think that only affects the time frame rather than the result. The slowing of the population growth has been consistent since 1961, which indicates we are locked into the biological Seneca effect. First time ever the rate of growth of humans has slowed, so if it is part of a cycle it is a hell of a long one.

Since it is a biological function, then the causes are biological. Simply that resources have been harder to get since then. From this point it is a logical step to remove the money supply from its link to a resource (gold), since the resource can't match the money required. Nixon's move in 1971 is no surprise in this context.

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How different is 4.9% compared to 5% ???

 

Oh, the house is only half burning, the other half is still safe.......

 

How different is 4.9% compared to 5% "theoretical" bench mark before investors panic ??

 

"Oh, I think today I shall move my benchmark to 4%" I had a nightmare last night....or a sign from God ???

 

Sooner or later (the RBNZ and John Key hopes it's "later") all this will implode right into everybody's face....Except that the pain will be much worse then than if we take the proper policy action now....(dreams ....)

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Could it be that GOLD will give you some protection ?

 

Not if it's this sort of gold. http://www.zerohedge.com/news/tungsten-filled-10-oz-gold-bar-found-middle-manhattans-jewelry-district
 

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