Tag Archives: Consumer debt

The New Zealand economy cannot live on debt forever

Brian Gaynor in the NZ Herald wrote a piece on the amount of debt in the New Zealand economy and the fact that the Reserve Bank needs some fresh ideas to stem the increasing trend. With the OCR increasing this week to 3.5% the disposable income of the floating mortgage holder will reduce and ultimately impact on their ability to spend – floating mortgages represent 33% of all mortgages in dollar terms. Although higher rates help those that have money in the bank however a lot of this is from overseas investors so interest payments leave the economy. Furthermore the elderly tend to have savings in banks but they are not seen as significant spenders. The higher interest rates also attract ‘hot money’ as NZ’s rates are higher than most other industrialised countries.

The amount of debt in the economy is a major concern especially when you consider how much is mortgage debt – see below. Also the fact that debt as % GDP is now 88.5% and 145% of disposable income – this is putting pressure on inflation not forgetting that people are living very much beyond their means.

NZ debt 2014

The RBNZ is concerned with this debt and introduced restrictions on high loan-to-value residential mortgage lending. They see that there is too much emphasis on housing which is being fuelled by greater access to debt. One only has to look at the Irish property to see how things can wrong – house prices dropped 50% between 2007 and 2012.

NZ Debt % GDP

US Economy: Private Debt to Aggregate Demand 1990-2013

Interesting post on the Credit Writedowns site by Aussie economist Steve Keen in which he explains why America has gone through ‘the Great Moderation’ since 2008. Below is a very good graph to justify his statement and part of his post.

the Great Moderation occured because Americans borrowed up big from 1993 till 2008, increasing private debt from $10 trillion to $40 trillion when GDP rose from $6 trillion to $14 trillion. It’s also why ‘the Great Recession’ occurred – because when Americans stopped borrowing and instead started to reduce their debt, demand (for both goods and services and assets like houses and shares) collapsed.


So contra Bernanke’s belief that the aggregate level of private debt doesn’t matter, it matters a great deal. That in turn means that Americans are very unlikely to spend more because of QE, because they’re already straining under a level of private debt that is unprecedented – even after several years of deleveraging, the level of private debt compared to GDP is higher than it ever was during the Great Depression.

Even Sweden starts to look a bit shakey

Championed as an economy which has effectively weathered the GFC, Sweden’s output is now starting to slow. Like Germany their economy is very export dependent and specialises in high-value manufacturing and therefore has been affected by the slowdown in both Europe and China.

50% of GDP is export related and because of the global downturn industrial production is down 5% this year although the strong Swedish Krona hasn’t helped matters. The Swedes have some concerning debt issues in that households have a debt-to-income ration of 149% – the Dutch rate is even higher 250% and the Danes are at 267% – see graph below. However the public sector debt is low and gross national debt is 37% of GDP. For the private sector the house prices have increased relative to incomes and rents and this is in a country with so much land and so little population ought to be a worry for policymakers. With unemployment on the rise households will find it harder to to pay off their debts and the banks might have to take some big losses.

Gross debt-to-income ratio of households % Source: http://epp.eurostat.ec.europa.eu

A model of over-indebtedness

A research paper in the New Zealand Economics Papers Journal (April-August 2011) focused on the impact that money management and mental accounting has in over-indebtedness. Over the last decade the increase in consumer debt in Western societies has risen dramatically and when you consider the recent financial crisis it is likely to get worse. Exisiting reserach on over-indebtedness has largely focused on the following:
– individual socio-economic, personal, and situational circumstances
– employment conditions
– time preferences.

Money management refers to an ability to organise and pay bills on time and also plan for future expenditure over forthcoming years

Mental accounting refers to consumers’ cognitive monitoring of upcoming expenditure and income. It is said that consumers form mental structures for money coming in and for money going out. It is sometimes refered to as Mental Money Management.

It is difficult to follow rigid money management practices unless these have been internalised or practiced mentally although mental accounting structures will be at least partly informed by a person’s money management practices.

The graph below shows that over-indebtedness will nearly always be intiated or prevented by personal and situational factors such as: social networks; financial literacy; divorce; illness, unemployment etc.

Maintaining financial self-control can take a lot of willpower. Automated money management practices and internalised mental accounting structures and rules are able to keep the will power required to control the propensity to spend