Rant on more NIIP complaints

I wrote this as a comment over on Dim Post on this blog post.  Then I decided, why don’t I just use this rant as a blog post instead, so I don’t need to think of anything else to write?  Sure, very few people will see it, but it will reduce my workload for the day 🙂  So here it is:

Update:  Danyl notes the post here.  Just to be clear – I’m probably far too terse in this post, but that is due to exacerbation about the issue.  I love Danyl”s stuff, and read the blog all the time, but the line I quote in this post just saw all the frustration from recent years come out of me in a rant 😉

“Whenever opposition finance spokesmen talk about ‘re-balancing the economy’ they’re really talking about reversing that grim, downwards march into eventual fiscal oblivion and an IMF bail-out.”

Have you started working for the Labour or the Greens now, or have they just talked you into putting misleading graphs up on your blog out of context?  If they win, then National will start doing the same thing no doubt saying “look it rose under Labour, then it fell under National, then it rose under Labour” … which would also entirely miss the point.

If this is really how people are thinking, economists need to do a better job of publicly describing what is going on with our NIIP (on that note, this is the net international investment position – a deficit means that the stock of liabilities we have to the rest of the world exceeds the stock of foriegn assets we have a claim on).

For one, this graph should always be looked at as a % of NGDP – looking at net debt in levels when prices and incomes changes doesn’t make sense.

Secondly, a significant driver of our borrowing in the coming five years is due to the rebuild of Canterbury … we could just not rebuild the city, but the “expected return” on investment is probably positive and we also want to as a society.

Thirdly, we have to ask where the debt is held and why.  The debt is held by banks, and it is held by banks who are owed money by households (and to a lesser extent highly leveraged farmers who have been ramping up farm capacity due to the sharp increase in the real price of primary products).  As a result, any “solution” should involve asking why households are borrowing so much and should try to deal with that – rather than arbitrarily targeting debt.  And note it isn’t people “buying houses” – as that is a transfer from one NZers to another (or with a foreign buyer it is actually a reduction in net debt).  It must be from NZers consuming (which the data does not suggest) or investing (which includes building houses).

Fourthly, people are currently lending to us at incredibly low rates of interest (this isn’t just an issue of headline interest rates – it is fundamentally the idea that we can import goods and services cheaply, both in terms of the initial prices as well as borrowing conditions).  Individuals are borrowing, understandably, because they think they can make a larger rate of return.  Is there a difference between the rate of return the individual makes and the social rate of return for some reason? Are individuals fundamentally wrong about the rate of return they can make, and so do their excesses need to be restrained.

Fifth, and importantly, we are looking at a STOCK OF NET DEBT we should compare that to our STOCK OF ASSETS rather than the RETURN ON ASSETS which is what NGDP is.  I would note that if there is a “bubble” in the value of our assets, it means we can sell them, pay down debt, and then rebuy them later at a lower price.  So we have to be careful to be consistent with our arguments here.

Sixth, government borrowing won’t lower the NIIP.  Financing through buying bonds will … but only because it is a regressive tax!  I find it incomprehensible that the left would be the ones pushing regressive taxation as a way to pay back debt.

Finally, a lot of this debt is denominated in NZD.  The RBNZ site has the figures on this.  So if the risk premium on our debt goes up because people expect default, the currency will plummet (something Ireland and Greece couldn’t do) and the value of a lot of this bank debt will decline … people lending to us are explicitly taking on a whole bunch of the risk.  If our debt starts being denominated in other currencies, without countervailing insurance, then I’d start to get a lot more nervous.

Hell yes the large stock of debt, that appears to be implicitly backstopped by government (hence the push to introduce schemes like the OBR) is a risk.  But saying we are on the road to an IMF bailout is frankly ridiculous.

Now there IS a big risk from this.  If export prices collapsed we would get hit, we would then experience a bailout in the same way that following a disaster central agencies tend to give support – policy that are meant to take this into account, say building up an emergency fun, could make sense.  But we justify this by thinking about the actual risks – not saying “look at my pet indicator, therefore we need to do loosely related policies such as RBNZ financed investment, just cose”.  Many of the other opposition policies would actual worsen the NIIP … but I don’t give a crud about that, as NIIP is not a target, just like productivity isn’t a target … the government isn’t a frikken business manager.

“Rebalancing” involves actually asking why the balance is how it is – and to be honest I’m absolutely sick to death with the fact that I’ve been repeating this point in the paper, on the blog, in meetings, in presentations, and drunk in bars and the peoples “solution” to it has been to entirely ignore the question (outside of say the RBNZ and Treasury, where they were working on trying to understand these issues well before I was a twinkle in Infometrics eye).  Disagree with me sure, but base it on an actual logical argument – can people answer f’ing why first.  “Solving” a problem without actually understanding anything about it leads to shit policy – and it’s just another indication that people involved in politics care more about sounds like they are trying to improve society, then actually trying to improve outcomes.

And serious, that chart is frikken misleading – you could get the same general point across by using the ratio to NGDP, even if the ratio to domestic assets would be better again.

13 replies
    • Matt Nolan
      Matt Nolan says:

      Wrote this at home and didn’t have access to excel (recently formated computer). Now I’m at work, so won’t have the chance till later on.

      I would be suprised if the chart isn’t on the Treasury site somewhere 😉

        • Matt Nolan
          Matt Nolan says:

          Cheers – although tbf that doesn’t include forecasts (which I think nudge it back to 80% over the next few years … I haven’t actually read the Budget forecasts yet 😛 ).

          It is at a level where, given fair assumptions about what NZ is, it is symptomatic of something. Which is wy so much has been written about it, and so many “savings” related policies (national savings – not individual savings, which in a macro context are not always consistent) and tax policies have been suggested.

          Instead, our politicians (and the post I linked – hence the reaction) are offering us unrelated policies, dire warnings of turning into a basket case … for having a large and risky net debt position that we have had for a while.

          And all of this exists without me mentioning the fact that the deficit is probably overmeasured … a fun fact we can leave for another time 😉

          • Luc Hansen
            Luc Hansen says:

            I couldn’t find a forecast, but it wasn’t for lack of trying. What I did notice on the RBNZ website was that gross overseas debt has been relatively stable over many years, albeit gradually increasing over GDP increases, but I wonder what our economy would look like absent the overseas money? Cuba?

            • Matt Nolan
              Matt Nolan says:

              Huzzah! Forecasts.


              “I wonder what our economy would look like absent the overseas money?”

              I suspect that absent the lending something would have happened – less investment in housing and agriculture probably. Or at least investment in different way. Probably lower consumption as well, at least in volume terms. It would have been a credit constraint, so it would impact in whichever way that comes in.

              We can’t think of it in terms of “an individual not borrowing” as macroeconomic issues are a bit funkier. Eg, imposing a general constraint when the liability is mainly concentrated in certain hands doesn’t necessarily help matters – and explicitly hurts a bunch of vulnerable people with volatile income.

              My main thing is, figure out where our concern lies, and deal with it directly. Saying we are about to collapse, and then using it to sell an unrelated policy, is the increasingly common attitude that led me to spit tacks here 😉

  1. boristhefrog
    boristhefrog says:

    The trick with the left is finding someone who is prepared to be honest in debating trade offs etc – because I suspect that most of the time they will end up agreeing with a position they emotionally don’t agree with…

    • Matt Nolan
      Matt Nolan says:

      I think that this isn’t an issue with the left in of itself – it is an issue on all debate. We all have value judgments, but the trick is to try and figure out exactly what trade-off exists before applying this judgment.

      There is no need for people to agree on policy conclusions after that, which is cool, but we have to frame the issue in a way where we can understand the problem before we can do that. The reason this frustrates me so intensely is because I get the impression L-G haven’t looked at the trade-off, and have no interest in doing so, as if they did they’d find that for a number of the suggested policies a lot of the “costs” actually fall on their core voter base. As a broader point, if political parties actually cared about outcomes for the people they represent, they would want to honestly admit trade-offs and then try to interpret the social will for this through the democratic process (which is hard given Arrow’s Impossibility Theorem, but still necessary) – instead they pretend the trade-offs do not exist, or paint a false trade-off (we get the RBNZ to buy government bonds or we have a financial crisis … a prime non sequitur) which insults me in moral terms.

      I still probably shouldn’t have been as terse as I was in this post – undeniably. But the mix of frustration from seeing these issues repeatedly looked at in misleading ways (without the full set of costs and benefits being considered, which requires “causes”), and the constant calls of economist being “naive”, “stupid”, or “incompetent” coming from many of the same areas (Danyl’s constant attacks on Treasury for the fact that their conditional forecasts of incredibly uncertain variables aren’t always right counts as part of this for me), has overwhelmed my preferred focus on patience.

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