I don’t know – we did do a lot of investment over the last five years. We borrowed money to get plant and machinery and build factories.

Even if we did borrow to spend to some degree this would only be an issue if households misinterpreted the housing bubble as real wealth – and even though this is an issue there is nothing we could of done about it to start with.

Interesting comment. However, again I would state that my concern isn’t regarding the size of the deficit – it is the uncertainty provided by such an large error term.

Stephen – indeed there is nothing wrong with a current account deficit – even one that is 9% of GDP. As long as household have well based expectations about future income streams then there is nothing to be concerned about.

Remember also, that if we buy things from overseas and they just hold a “claim” on resources that will come into the capital account.

I agree that it isn’t necessarily a problem – however, it is a statistic that investors use as a signal so it does have a real impact. When we have enormous errors like this I start to get concerned about the quality of the signal – and no doubt so do investors. This creates uncertainty – which is not nice stuff.

I note Miguel felt a similar way – but I think that the uncertainty issue associated with it is the prime one.

There is at least one other well known measurement problem: SNZ does not measure foreign assets privately held by NZ residents, unless they are held through a financial institution (such as a pension fund or bank). Thus pension fund assets owned by NZ in a foreign pension fund (say a UK fund owned by someone who worked in London for a while), foreign shares (including non-dual-listed australian shares) purchased by NZers, and foreign assets owned by people migrating to NZ are not measured. As a consequence, the earnings on these assets are not measured either.

Perhaps a good game would be to guess the size of these assets (my guess: half as much as last year)

Just by national accounts logic the BOP has to be zero, a deficit on the current account has to be covered by a surplus on the capital account, or the other way round. If we have a current account deficit of $1 billion then we have to find $1 billion to pay for those goods. The way we pay for them is via either borrow money from overseas, or sell assets. This will gives us a capital account surplus.

Let us say we sell $1 billion worth of goods and services, but buy $2 billion. We have a current account deficit of $1 billion. But let’s say that those who have received our dollars merely keep them under their mattress. We have a deficit, but we do not need to finance it by borrowing from them.

They have a claim on our goods and services in terms of the use of money, but the fact that they’re willing to hold our dollar probably suggests that we aren’t doing too badly.

Or am I completely wrong on this point?