The shift from debt-financed consumption to greater saving and investment is also expected to support the household sector’s capacity to repay its debt.
This is from the RBNZ’s Dec 10 bulletin. This is a good article, but the nature of this specific sentence grates me. I would suggest reading and enjoying the article for what it is – and viewing my discussion below the fold as a discussion based on an interpretation of this sentence, not a discussion of the article per see.
This sentence gives the feeling that, as Bill English has stated, we have borrowed from overseas to load up on flat screen TVs and the such – we have been “living outside our means”, and we will now “suffer the hangover”. This type of sentiment makes me a bit uncomfortable (after all, GDP measures production, if we have borrowed to consume from overseas then that is GDP neutral – why should we expect GDP to be substantively lower on the back of it?). Even so, lets just leave this to the side, and think of another possible way of viewing the data.
What happens if the debt-financing was of investment, residential investment. Does this really mean we need to cut “consumption”.
The key point here is that we do need to see a relative decline in consumption, when we include the consumption of housing services as well. We could just as easily see a cut in future residential investment rather than the consumption of things we would normally associate as ‘consumption goods’.
Remember, people built houses thinking that they were building up a nest egg. They were investing, and viewing it as savings. Given this we can’t say that the run up in our net debt position stems from an inherent desire for households to save less than is sustainable – we would instead say that households have been borrowing to invest, with the view that in the future they can use that investment to pay down debt.
When we look at it with this lens, we can see that (if this description accurately describes part of the issue AND if the borrowing was actually excessive) it was tax policy and household expectations around the residential housing market that were out of whack – not people’s desire to spend their income on typically defined consumption goods. Framing it this way gives a very different set of policy prescriptions than some of the ones that are floating around (such as compulsory savings).