NGO Another Way (Stichting Bakens Verzet), 1018
SELF-FINANCING, ECOLOGICAL, SUSTAINABLE, LOCAL INTEGRATED DEVELOPMENT PROJECTS FOR THE WORLD’S POOR.
Edition 01: 09 May, 2013.
Summaries of monetary reform papers by L.F. Manning published at http://www.integrateddevelopment.org
The referenced papers :
COMMENTS BY :
On balance it is
probably preferable to work directly with official statistics such as those
provided by the Reserve Bank of
Selecting data tends to create a reporting bias.
The NZI paper
extends to 70 pages without providing an adequate visual overview of
The NZI report is disjointed and hard to follow. It poorly illustrates the methodological differences in the various data series. NZI Figure 1 purportedly “shows the best available estimates of the total international liabilities.....” when the official national accounts data produced by Statistics New Zealand (SNZ) plotted as Figure 2 below are readily available on line. The SNZ balance sheet (BS) data apparently gives debt figures 9.2% higher than SNZ Balance of Payments (BoP) data [NZI p. 4 RHS top]. The NZI use of the BoP data instead of the BS data needs to be fully justified, while stock based figures that include revaluations (as in NZI Table 1) may be useful but are not immediately relevant to the nation’s current external debt position.
The apparent discontinuity in 2001/2002 in Figure 1 could be related to the
fallout from the 9th September 2001 attacks in the
COMMENTS ON PRELIMINARY PAGES OF NZI PAPER.
P. v : Foreword.
Free trade has to be bounded so as to avoid large scale current account imbalances, but it is not. One can have free capital flow but not asymmetrical capital flows. When the outcomes are asymmetrical, trade and capital mobility do not constitute “a mechanism that creates prosperity for all” as NZI claim, because the additional wealth the economy creates is being drained offshore through foreign ownership of the economy.
P. vi : Import of capital.
The NZI paper shows
The single key event was when US President Nixon abandoned the US$ gold peg on August 15th 1971. The asymmetry in the world financial system could not have arisen were the peg still in place because asymmetrical events would have forced stabilising currency de(re)valuations. The more recent “floating” exchange rates do not work in the face of unbridled speculative capital flows.
P. xiii : Key messages.
Key message 1.
In the early days
Key message 2.
The oil shocks did
result in current account deficits and consequential investment inflows. They were
not sterilised and resulted in increasing net overseas debt. The oil shocks
could not have happened prior to the abandonment of the
Key message 3.
The current account
problems have little to do with the 1970’s per se and everything to do with
over consumption (including that resulting form the oil shocks) and the “free
trade” policies the NZI paper appears to be promoting. Keynes argued in favour
of “balanced trade” at Bretton Woods in 1944 and was vetoed by the
Key message 4.
The NZI text is wrong. The way to fix the investment and debt problems is to manage the exchange rate and rebalance the broad balance of payments so New Zealanders can buy back their country and enable other countries can do the same. That will not be possible unless effective policy tools are implemented (like the author’s proposed foreign transactions surcharge (FTS)- the details of which can be found at www.integrateddevelopment.org ).
P. xiv : Myths about International Debt and FDI.
Myth 1 : NIIP is negative because domestic investment since 1973 has exceeded national savings.
Contrary to what the NZI paper says, the causality is the current account deficit itself. The “borrow and hope” program was indeed funded by foreign borrowing, and the “think big” projects did involve foreign components and foreign companies. Despite that, as shown in Figure 1 above, the external government debt to GDP ratio rose faster before and after “think big” due to the 1970’s oil shocks and the Labour government’s free for all in the mid 1980’s. Moreover, external government debt was reduced (at huge public cost) to very low levels through the 1990’s until the recent debt crisis began. The negative NIIP was exacerbated by the deficits on international investment income caused by increasing foreign ownership of the NZ economy, including the banks. The NZI text (top left p. xv) is true in part, but it is not the government that is borrowing abroad to fund fiscal deficits. The government has recently borrowed abroad because it is cheaper to do that than borrow from the domestic banks. The relatively high domestic interest rates are due to foreign ownership draining the NZ economy. To be certain of this, the data in Figure 1 replicates the gross and net government debt data for the 50 years ending 2012. The NZI paper fails to show the (more appropriate) net government external debt position. Net government debt as a % of GDP has never been excessive and funding it, while substantial, makes up less than 15% of the present current account deficit.
Myth 2 : NZ ‘s large negative NIIP arises because since the mid 1970’s ‘we’ have been spending more than we earn.
The NZI argument is misleading. It says that because the Balance of Trade has been in surplus neither business nor the public is responsible for the deficits. Somehow that means according to NZI that “ [b]y definition, gross domestic spending on goods and services was less than gross domestic production....”. This neglects all other spending on foreign goods and repatriation of profits and interest and so on that are part of the current account. The myth is absolutely true.
Myth 3 : NZ has a large negative NIIP because New Zealanders are poor savers.
The NZI argument about myth 3
is also misleading. NZI says “national
saving has been positive for 38 out of the 41 years between 1972 and
“Saving rates in
In orthodox terms, New Zealanders are relatively poor “savers”. The issue is whether that poor saving affects NIIP.
There are always
“savings” because total productive incomes include those arising from new
capital development. Conceptually those incomes are “saved” and used to
purchase the capital items the economy produces. In practice, in the debt based
financial system, most capital items are funded by new bank debt. Most
“savings” from gross household and business incomes migrate instead to the
non-productive investment sector (equities, property, bonds and the like and
household debt servicing, especially to pay the unearned income on banks
deposits), or to pay for excess expenditure on the current account. The
accumulated current account deficit, which in
Myth 4 : NZ’s large negative NIIP is due to the private sector.
This is not a myth either. NIIP, primarily reflecting the accumulated current account deficit, results from foreign ownership of the economy and the failure to bring the current account and exchange rate under control. This is due to free market, free capital flows, and so on. Foreign ownership has grown because NZ has lived beyond its means while not fixing its current account problem.
“The sharp rises in the NIIP from 1974 to the mid 1980’s was associated with heavy government net overseas borrowing”. That is partly true as long as the word “associated” is not treated as being the cause of the debt. The data appendix (AS 25) supplied by NZI starts from 2001. Myth 1 above and Figure 1 clearly show that net government external borrowing was reduced to zero by March 1996.
On the other hand there is a convincing argument that government debt is caused largely by the periodic reductions in private sector tax rates. For the time being it have been cheaper for the government to borrow abroad than to sell bonds to the domestic banks or other institutions. This is why the banks themselves are borrowing abroad now! The main point is that now, under a National led austerity government, the private sector (households and businesses) is by far the main driver of the NIIP, with the possible exception of the 2011 and 2012 years.
The NZI statement
(top p. xvi) “that the high NIIP today is a legacy of the policies and events of the
1974-1984 period” is untrue as a glance at Figures 1 and 2 above demonstrates. The net government
overseas debt was zero from mid 1990’s to 2001 through both national and labour
governments. In 1991 the
Myth 5 :
The text may be referring to private NIIP debt. If so, NZI is implying that it doesn’t matter if NZ is foreign owned, though it may be true that NZ “borrowers [have been] borrowing unwisely – for the last 25 years” as NZI say. The NZI text then supports the banks’ offshore borrowing! Apparently they cannot be borrowing unwisely “given the intensity of the scrutiny they face”. The truth is apparent. The banks borrow abroad for one reason: they profit from it because their offshore borrowing costs are less than onshore deposit interest. There is no net liability to the banks because they hold the equivalent NZ domestic exchange in reserve. So contrary to the NZI text there is no moral hazard in the banks’ arbitraging as long as they have reasonable currency hedging in place.
Myth 6: NZ’s large negative NIIP is due to banks borrowing to fund new housing.
That is a myth as NZI claims. The accumulated current account deficit is due to NZ spending too much and giving away ownership of its resources. The current account is funded in the first instance by domestic debt. Once foreigners are paid, the corresponding deposits return to NZ to buy whatever the foreigners want. The sale of those assets leaves deposits in the hands of the domestic sellers. Most of that money goes into inflating the non-productive investment sector, including housing.
The NIIP is due mainly to the current account deficit, not funding new housing. The investment sector inflation is a consequence of the current account deficit, not its cause.
Myth 7 : Attaining a fiscal surplus 2014-15 will start reducing the current account deficit.
This is not a myth. A fiscal surplus (that is : a theoretical ability to repay government overseas debt) could enable the government to pay down its net foreign debt (Figure 1 above). That would improve the net NIIP position. The repayment will not affect the current account much because the government borrowing is a capital transaction. These days, government debt is not typically used to pay for foreign goods and services. It is, instead, used to pay for domestic goods and services and transfer payments. Only the interest on the government foreign debt appears in the current account. A reduction in the interest payments will reduce the current account deficit a little, though only a pittance – a reduction of NZ$ 2b. in the capital account at 3% would improve the current account by, say, NZ$ 60m. out of a current account deficit of some NZ$ 10b.
Myth 8: Asians are increasingly taking over NZ.
This is not a myth
either. While it’s true the vast bulk of Foreign Direct Investment (FDI) is not Asian,
NZI itself says Asian FDI is increasing. The free trade deal with
Myth 9 : NZ companies are not investing offshore; NZ is open to takeover but it isn’t two-way.
There is an element of truth in what the NZI text says but it is still misleading. Their Figure 3 shows inwards FDI “stock” at almost 50% of GDP and outwards “stock” at just over 10% of GDP (NZI Figure 3 p. xxiv). The stock measures include revaluations that are internal balance sheet items rather than cash-flow items. The NZI text therefore needs to be treated with caution.
This is definitely a myth. The important point is that FDI should be limited to what serves the NZ economy. Until now NZ has just been selling its economy.
Myth 11: Passive investment is less useful than direct investment.
This is not a myth,
but neither is it especially relevant. NZI says “Foreign portfolio investment helps reduce the cost of capital in
Myth 12 : New Zealanders are becoming tenants in their own country because of growing foreign ownership.
The NZI text is utterly and deliberately misleading on this point because it refers only to land. The economy is not land. It reflects the ownership of the means of production. New Zealand’s productive capacity is already more than 60% foreign owned where foreign ownership is measured as the accumulated current account deficit/value of capital investment at cost. NIIP could also be used. If the outstanding capital investment principal is used instead of capital investment at cost, the extent of foreign ownership is even higher. Since GDP= the outstanding capital investment principal as set out in the “DNA of the debt-based economy” by the author at website www.integrateddevelopment.org, monetised production is dependent on the outstanding investment capital, not on the unrealised value of land and property assets.
NZI discusses other
methodologies for assessing % foreign ownership in Section 2 of the main
document. Land (agriculture) contributes a relatively small portion to NZ GDP
despite its critical importance. The numbers for it are in the NZ national
accounts. In the
PP xix-xx : Key points : NIIP and indebtedness.
The NIIP numbers
NZI uses are misleading in part because they are distorted by more than NZ$ 16
billion capital inflows relating to the
The difficulty here
is that re-creating the status quo ante is called “investment” when it is
really more like maintenance and repair because the net value of NZ assets does
not increase as a result. At best they return to what was before the earthquakes. Moreover the BoP Manual 5 rules specify
that the whole insurance inflow from the
Perhaps that is why NZI doesn’t mention the figures for the intermediate years in their text, though they can be traced in table AS 25. Without that specific one-off NZ $16b. “capital inflow”, the NIIP numbers would be at least 10% higher than those shown in the NZI text.
When that 10% correction is made together with the 9.2% from using the BoP method instead of the BS method, the real NZ international debt equals the accumulated current account deficit (94% of GDP in 2012) less a small deduction of about 4% for the residual accumulated capital inflows, or about 90% of GDP.
The future path for NIIP is not primarily “a function of the earnings rate paid on the NIIP relative to the GDP growth rate” as NZI claims. It is mainly a function of persistent current account (CA) deficits. By inference, NZI seems to think it is fine if all the GDP growth leaves the country in the form of those CA deficits. The nation as a whole is then left the impossible task of sustaining the increasing drain of wealth into foreign hands.
As described for
the “myths” above, the statement that “these
[NIIP] statistics indicate today’s highly negative NIIP is largely a legacy of
the prolonged deficit spending between 1976 and
P. xxi-xxii. Key Points : Foreign Direct Investment.
The numbers offered by NZI are largely meaningless when the official accumulated current account deficit can be used as shown in Figure 2 above which is arguably more accurate, especially over the earlier period.
The BoP manual and commentary on it show that is has always been difficult to split current flows from capital flows. In most countries the separation was not made at all for most of the period 1962-2012.
No evidence is
provided for the statement that “the OECD
If NZ’s high “net external indebtedness has long troubled policy makers and rating agencies alike” (p.1 RHS bottom) one would have thought they would have something done about it, such as the author’s proposed foreign transactions surcharge (FTS) information on which is available at www.integrateddevelopment.org.
2. Notes on key concepts and relationships.
2.1 Terminological distinctions and issues.
The NZI text [p. 4 RHS top] refers to SNZ Table AS 36 but it doesn’t appear to be in the appendix. The table says the “estimated asset and liability positions are higher for the BS [Balance Sheet] presentation by 9.2% of GDP on average [than they are for the Balance of payments figures]”.
SNZ measures of international borrowing and lending include derivatives while the IMF measures of external debt do not.
2.1.4 Overseas debt.
SNZ figures for banks’ overseas debt are larger than Reserve Bank of New Zealand (RBNZ) figures because SNZ follows IMF BPM5 that includes banks and other financial institutions.
2.1.6 IIP measures.
SNZ/IIP stock based measures rely on surveys. They can’t just be worked out from flow measures.
2.2 Key identities.
2.2.1 IIP Stock flow dynamics :
Closing stock of investment = opening stock of investment + Foreign investment over the intervening period + Valuation changes during that period.
The stock number is about “value” not debt. That means it is difficult to get a foreign debt figure from a stock figure because valuation changes such as exchange rate changes, financial derivatives valuation changes, market price changes, and “other valuation” changes are unrealised. Nor is it clear whether those changes are net of depreciation/ debt repayment.
NZI itself writes “If the second and third items [of those mentioned above] have only a small effect, the net investment flow will closely approximate the current account deficit (or surplus) in the BoP.”
That is one reason why the author of this paper uses the accumulated current account data as a first approximation in his work. This is confirmed at NZI Table 4 p. 12 where the current account deficit is funded by the net capital account inflow plus net foreign investment inflow as used in Figure 2 above.
“Change in stock of investment as % of GDP= (residual net investment flows plus valuation changes) as a % of GDP during the intervening period plus (opening stock as a % of GDP for the same period times the difference between the earnings rate and the rate of growth of GDP divided by the proportionate growth rate of GDP)”. [sic?]
The calculations and text giving rise to NZI Table 2 (p. 11) look dubious and there is a big typo error bottom right of the table where the NZI text p.12 LHS top gives 72.1% not 62.9%.
2.2.3 Two identities linking the BoP to the national income accounts.
That is dealt with at great length in my paper on the “Savings Myth” available at www.integrateddevelopment.org which among other things shows that the use of capital consumption (depreciation) as in NZI Table 5 is incorrect. Depreciation is a tax variable not a value variable so it cannot satisfy the BS stock-flow dynamics. [2.2.1 above].
3, Overview of the latest statistics.
3.5 Degree to which NZ assets are now overseas funded.
This is misleading. The test is not the “capital stock including land and residential buildings” but the country’s productive economy. A completely different result is obtained if the ratio of the accumulated CA deficit to capital investment at cost shown in the National Accounts is used. That ratio shows more than 60% foreign ownership compared with 12% claimed by NZI (p. 26 LHS bottom). NZI then gives various other flow “comparisons” such as (p. 26 RHS bottom) comparing “total income paid overseas” NZ$ 14.9 billion to “operating surplus net of capital consumption” NZ$ 57.2 billion giving 26% foreign ownership. It is not valid to compare a net tax paid payment with a gross operating surplus because that defies all basic accounting principles. Therefore, NZI Table 8 needs to be taken with a grain of salt because none of the numbers appears to reflect the true status of foreign ownership.
4. Comment on the historical record pp. 30-45.
4.1 Nineteenth century.
Interesting but not relevant to today.
4.2 Early twentieth century.
Ditto. Blanket foreign exchange and import controls imposed in 1938 (Reserve Bank formation, Labour government) changed the debt profile.
4.3 1950-mid 1980’s The protectionist years.
The following quote gives the flavour of the text: (p40) “It was not important if the costs to NZ consumers were very high because successive governments made sure consumers had little or no choice”.
The foreign ownership of NZ business and assets resulting from free trade hardly offers a better choice. Moreover, any claimed positive effects of the “choice” are short lived as is now apparent from the progressive loss of real purchasing power arising from foreign indebtedness. Nash (as expressed in the text at the bottom of NZI p. 40) was probably closer to the truth.
deficits used to be limited through the application of the
Section 4.3.3 1970’mid 1980’s- Big Deficits - is about escalating debt.
This is the “spend, borrow and hope” period discussed in the preceding pages of these notes. NZI forgets to mention that almost the whole world went through the oil shocks and the huge deficits and inflation they created. That’s where the sea of petrodollars came from! What does NZI think that little NZ should have done?
Of course imports
exceeded exports for most of this period
The NZI figures
bear no relationship to the figures in Figure 2 of this paper. Figure 2 is based on the official national accounts
and shows that the increase slowed after the oil shocks. It rose again later
under both Labour and National governments. As previously stated, the primary
reason for that was the deregulation and globalisation that followed after the
4.4 1985-95 Fiscal Consolidation and Liberalisation.
The COST of the
liberalisation has been the sale of
Much of the text p. 43 RHS relating to the benefits of selling off State assets is false. Yes, the government foreign debt was reduced. That was not achieved from the asset sales but from the vicious austerity imposed on most of the public. Moreover, as the text itself acknowledges NZI RHS p. 44: “Selling assets such as ... to overseas investors and using the proceeds to reduce foreign currency denominated government debt does not alter the net external liability but it does change its composition”.
The ideological bias of the NZI document is there in Orwellian terms for all to see. That ideology is why we have such an escalating current account problem today due to the vast asymmetry between inwards and outwards flows.
4.5 Post 1995-2012 : The Mixed Member Proportional Representation (MMP) era.
According to NZI NZ has somehow “lost competitiveness” because of MMP! NZI blames MMP for the post 2009 fiscal deficits – as if NZ created the world debt crisis. In fact, the recession in NZ was 100% self-inflicted. Banks directly caused the recession by failing to pass on Reserve Bank interest rate cuts in favour of boosting their loss reserves, thereby squeezing credit. NZI does, however, highlight the risk of increases in external liability (bottom RHS p. 44).
END OF FILE
THE REFERENCED PAPERS
The referenced papers :