Sell assets to avoid debt; take on debt to build motorways – huh?

Written By: - Date published: 7:05 am, August 16th, 2012 - 76 comments
Categories: debt / deficit, energy, privatisation, transport - Tags:

So, let me get this straight. Debt is bad. So bad, in fact, that the Government is willing to sell assets that produce higher returns than its cost of borrowing to free up money and avoid taking on more debt. That would actually increase government borrowing by $100m+ a year forever but, in the short-term, would offset the need to borrow $6 billion. But this same Government is now planning to borrow to fill a $5 billion hole in its transport budget caused by its unneeded motorway projects.

The rules of business are pretty simple:

If you’re going to borrow, do it for things that produce wealth in excess of the cost of borrowing.

If you’re going to sell assets, do it when you have a use for the money that is more valuable than the returns (and other benefits) of asset ownership that you’re giving up.

National’s doing the exact opposite: selling valuable assets to avoid low-cost debt, then taking on about the same amount of debt to build motorways that are worse than worthless, with costs that exceed their benefits.

It’s like selling the money tree for firewood, and then going out and buying a white elephant on the credit card.

It doesn’t make sense. Well, it doesn’t if your objective is the best outcomes for New Zealand. If you’re looking out for the elite – who want high return assets at bargain prices and want taxpayer-subsidised roads to their holiday homes – then it makes perfect sense.

76 comments on “Sell assets to avoid debt; take on debt to build motorways – huh?”

  1. vto 1

    It is because this lot are deceptive and blatant liars.

    And it is because not a single media outlet anywhere in the land asks them these simple questions nor outlines these simplicities to the public.

    And it is also because this government continues to prove that the right wing mantra of free market is best and that they are best at business is complete and utter hogwash. Examples include centrist intervention in the Christchurch rebuild rather than letting the free market create a beautiful and perfect city (if ever there was an opportunity for the free market to prove itself once and for all this is it); include taxpayer support for the private stock market, the NZX, rather than let these little boys find their own way in the big bad world; include the need to take electricity companies off taxpayers for private investment because private investment has been incapable of creating its own electricity companies.

    All basic premises of recent right wing mantra have been proved incapable, useless and simply wrong by the actions of this government. Their words and their actions are opposites. It should therefore not surprise that they claim borrowing is bad while at the same time borrowing.

    • Tom Gould 1.1

      Don’t expect to read such an obvious clear headed analysis from any of the brain dead lazy Tory chooks in the Gallery.

    • Draco T Bastard 1.2

      +1

      And it’s not just the actions of this government that prove that free-market capitalism is a con – the entire GFC and the fraud that the banks were/are engaged in that brought it about prove it beyond doubt.

  2. ad 2

    Slightly tangentially, did anyone else go to the Transport Blog fundraiser last night? God it was so cool to be ni a whole picture theatre full of transport nerds, and all so utterly progressive. Everyone hating the motorway programme, all wearing their CRL Yes badges. It was like a littke bubble of happiness – with Twyford and Genter – against the current drudgery of this pro-motorway government.

    • Carol 2.1

      Thanks for the report. Glad to see Genter and Twyford are onto it and working together.

  3. AmaKiwi 3

    Tui beer ad: “NZ is one of the least corrupt countries in the world. Yeah right.”

    We don’t have corruption because we don’t have anyone to investigate and prosecute it.

    “National is not being bribed by the highway construction companies. Yeah right.”

  4. King Kong 4

    Governments borrow for large infrastructure projects because it is patently unfair to foist the cost of the project onto current taxpayers when the benefit extends through to future taxpayers. Debt repayments means that those benefiting pay as well.

    • thatguynz 4.1

      Even though I know the answer I’ll ask the question anyway..
       
      Given we are a sovereign nation and the Govt theoretically has control of the money supply via the Reserve Bank, perhaps you could explain why it makes sense to borrow the money from the international marketplace at all? 

      • King Kong 4.1.1

        Nothing to stop domestic investors buying Government bonds.

        • thatguynz 4.1.1.1

          I think you’ve missed the point.  Why do the government not create the money themselves for core infrastructure projects as opposed to borrowing it from the international institutions?

          • King Kong 4.1.1.1.1

            For the same reason the Government doesn’t invest in research into engineering golden geese which could also cover the costs.

            • Colonial Viper 4.1.1.1.1.1

              The Government can issue the money required to fund the projects, debt free, interest free. No need to fire up the printing presses even. Just write the spending authorisation into the Budget and credit the Consolidated Account with the amount needed.

              • thatguynz

                Precisely CV 🙂 
                 
                We would of course annoy the IMF/BIS/WB etc but quite frankly, given the direction that the world economy has taken under their “stewardship” – who cares….

              • muzza

                No response from KK at that point, as when faced with a question which can’t be answered, he runs away.

                Of course our sovereign governmenet can issue infrastructure funds, any time it likes with owing a priviate foreign entity a cent!

                The NACT govt IMO are on a mission to bankrupt the country. Sell income generating, strategically crucial services, and borrow money to pay for things we do not need. Both enrish the rich paymasters further, and ensure that when NZ does broke, and $120bn worth of off balance sheet derivatives along side the total net debt, says that we will, then the roads we have paid for, will be taken by those same entities we borrowed the money from, to pay for them…

                The rest of the “assets” will be taken as well, and the “loans” we are forced to take from the IMF/WB, will mean forced cuts to services into the bargain.

                Wont happen, nah we are special down here….

                • Draco T Bastard

                  Of course our sovereign governmenet can issue infrastructure funds, any time it likes without owing a private (domestic or foreign) entity a cent!

                  FIFY

                  I’ve been known to miss out entire words before as well.

            • Polish Pride 4.1.1.1.1.2

              That is the most BS argument ever. No reasearch needed the golden goose so to speak is fractional reserve banking! It already exists so instead of borrowing from the privately owned fractional reserve banking system….Nationalize it. Then they can put all the golden eggs toward paying off debt.,building roads and any other infrastructure they feel feel like. Common sense really. Borrowing as we do now instead is sheer lunacy!

              • Maxamillian

                I’m with you guys on the government just spending into the economy. But its even easier than you think – the system already allows the goverment to spend as much as it likes. Govt debt isn’t really debt. Read up on it – http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

                • mike e

                  max QE is what works borrowing is not required.
                  Thats what all big economies do that devalues their currencies and makes ours so expensive.

                  • Colonial Viper

                    NZ authorities have a naive concept of the free currency markets. W

                    e refuse to acknowledge that every major economy (EU, UK, Japan, US) are effectively printing money without limit. And our exporters get pummeled by their cheap currencies and end up looking too expensive in foreign markets.

                    • thatguynz

                      I don’t actually believe its because of naivety CV – in fact you summed it up in your comment.. The MAJOR economies print like there is no tomorrow. Even though we’re one of the top 7 traded currency pairs we’re still far from a major economy. Ergo – we damn well do whatever the IMF, the BIS and the World Bank damn well tell us to do…

                      What we actually NEED is autonomy. Then we’d be having a much much different discussion… But show me one political party that has anywhere near enough chutzpah to start suggesting that 🙂

                    • Colonial Viper

                      Yep. Banksters like Key were put in charge, and are supported in power, to prevent anything like sovereign or societal autonomy from occurring.

                    • thatguynz

                      Bingo.. 🙂

            • mike e 4.1.1.1.1.3

              So true king kong if they invested as much in research and development we would eventually be making golden eggs.
              rather than piles of debt.
              This government has continually ignored and cut R&D spending.

      • blue leopard 4.1.2

        @ thatguynz

        +1

      • Tom 4.1.3

        If you borrow from overseas its converted into NZD and the liquidity in the system remains the same as someone else sold it to you, but if you go to the reserve bank then the money supply increases putting in more liquidity ie quantitive easing. This is what they do to change the OCR manipulate the liquidity in the system

    • Polish Pride 4.2

      Well then perhaps the system is outdated and we should change to one where we no longer need to do this…….ever again.

    • Polish Pride 4.3

      Or let me put what thatGuynz has eluded to a little more bluntly – Why don’t we nationalize the fractional reserve banking system. If we need money for projects like this and money is being created out of thin air by the private banking system. Then surely we should nationalize banking so that the Govt can create this money out of thin air and use it to build the roads. Surely it should do that rather than borrowing from the private banking system. In fact it could do this and pay off the rest of the debt at the same time!

      Now before you go down the inflation track – I’m not proposing anything that the system is not already doing…just shifting the responsibilities.

    • Lightly 4.4

      borrowing for infrastructure makes sense only if the infrastructure you’re building is worth the cost incurred. Puhoi to Wellsford and Transmission Gully aren’t worthwhile. The Government’s own numbers say they’re worth less than their costs.

      • Polish Pride 4.4.1

        Borrowing never makes sense under any circumstances if something exists within the system already that would let you create money.
        Think of it like this If you have a have discovered the secrets of Alchemy and you can turn lead into gold in the back room of your house. Are you going to borrow some money? or buy some lead?
        Nationalizing the fractional reserve system would be buying the lead!

        • King Kong 4.4.1.1

          Why stop there? Nationalize the energy providers, food producers, contruction companies, supermarkets…

          There was a couple of countries who tried this last century I think. How did that turn out again?

          • Colonial Viper 4.4.1.1.1

            How’s free market capitalism turning out for the EU and the US, buddy?

            • King Kong 4.4.1.1.1.1

              The people have never been wealthier. healthier or more educated so not too bad I guess.

              • vto

                .
                wrong.

                for evidence re education go look in the mirror you egg.

              • thatguynz

                Seriously?  I’m hoping you’re taking the piss and you aren’t truly that uninformed.
                 
                Try having a look at the debt positions of each of those countries and tell me they’re better off?  You don’t see a debt bubble that not only makes a mockery of growth projections but can also NEVER be paid back?
                 
                Do you also believe that the “GFC” was solely due to the sub-prime housing market and it’s over?

                • King Kong

                  CV asked me if free market capitalism had been a successful model for US and EU and if you looked on a graph and plotted the way the lines have gone over history for average income, minimum income, life expectancy, university attendance, literacy, infant mortality, home ownership, access to healthcare, access to transportation, technology and innovation advances…You would have to answer a resounding yes.

                  Looking at the last four years in isolation is as disingenuous as saying that climate change theory is proved to be bunk based on the last 4 years of climate data showing none to little increase in warming.

                  • framu

                    your ignoring that, for example: in the US the biggest rise in all those factors and more, was under a managed economy (still capitalism) and their biggest decline (still ongoing) has been as a result of free market capitalism

                    there are different kinds of capitalism, just like there are different kinds of socialism (or any other ism you care to mention). Going to the extreme of either end is bad news

                  • thatguynz

                    That’s not what I said.  Yes, the last 4 years has seen what has quaintly been referred to as the “Global Financial Crisis” however the debt issue (or bubble) has been created over a much longer timeframe.  The relaxation of lending criteria to brorrowers who really couldn’t afford to buy houses is simply the current issue du jour.  Obviously that simple example isn’t taking into account the financial products subsequently created which amplify the magnitude of the problem.  As with any financial bubble the standard of living increases while the going is good.  When it starts to unravel or unwind however it is a much different story.
                     
                    Very simply put – when the interest on a debt is not created at the same time that the debt itself is created, that marks the beginning of a debt bubble.  There is simply no physical way that the debt can be repaid.  “Growth” as it is currently used by politicians doesn’t refer to long term wealth creation – it is a means to perpetuate the failing model with the inevitable result of magnifying the catastrophe when it collapses.
                     
                    What IS disingenuous is for Sovereign nations to perpetuate this madness – hence my earlier (granted – slightly loaded) question around Govt money creation vs. borrowing.

                    Update: (As Ben has also said below in comment 7.1.2)

            • Tom 4.4.1.1.1.2

              The only reason you aren’t ploughing a field trying to avoid starvation is due to the free market.

              • blue leopard

                @ Tom

                only reason?

                …and here’s me thinking it was due to the innumerable discoveries in technology….

              • Draco T Bastard

                Wrong, the only reason is the peoples sense of community. The free-market has, effectively, twisted that sense of community to the benefit of the bludging capitalists. If we’d left it to them in a free-market we’d be far worse off as the massive poverty of the 19th century proves.

                • ropata

                  The core mechanisms of middle-class-led growth include stable demand, trust, good governance, and a set of virtuous, forward-looking capitalistic and proto-capitalistic behaviors.

                  What has largely been forgotten is that Keynes recognized the importance of the middle class in creating sufficient demand to stimulate growth. He argued that extremely unequal distributions of income depress demand and thus reduce growth.

                  Studies across U.S. states, over time, and across countries all find that societies with a strong middle class and low levels of inequality have greater levels of trust of strangers. Trust is based upon the belief that we are all in this together, part of a “moral community”. Trust reduces transaction costs because less time and resources are spent verifying and policing. And trusting people see the world as full of opportunities. With higher levels of trust, people are more likely to innovate, seek out trade and new technologies, and generally take economically sound risks.

                  A strong middle class, as thinkers from Aristotle to James Madison to modern political scientists have noted, fosters better governance by helping ensure government is well-run, increasing citizen participation, minimizing factional fighting, and promoting policies for the benefit of all of society rather than special interests. In contrast, economic inequality and a weak middle class make the political system imbalanced and depress the political participation of the non-wealthy, reducing voting, discussion, and interest in public policy.

                  The disproportionate power of the wealthy is likely to cause taxpayer dollars to be wasted on rent-seeking activities—narrow tax breaks, special copyright terms, patent monopolies, giveaways of the broadcast spectrum, and mining and logging rights on public lands for below-market fees, among others—but also when the wealthy shift broad policy away from more efficient alternatives.

                  Members of the middle class set goals and strive to achieve them. A 2010 Department of Commerce report on what it means to be middle class in America today finds, “One characteristic that stands out in the literature on the middle class is that middle-class families emphasize their expectations about the future: this means they work hard, plan ahead, and expect to save in order to attain those goals.”

                  These positive values can be undone by extreme levels of economic inequality, as, for example, David Callahan emphasizes in The Cheating Culture, which explains how the rise in white-collar crime and ethical misconduct has been fueled by rising economic inequality, broken down social norms and made cheating more rewarding.

            • Foreign Waka 4.4.1.1.1.3

              Hi CV, I am in Europe right now and have observed that genarally people are wealthier, the infrastructure is second to none and the lifestyle at least here in Vienna is fantastic. BUT – healthcare seems to get rationed, access to welfare is far stricter than in NZ, i.e. unemployment benefit is available for 7 months and becomes an emergency benefit after that. Also time restricted. There are poor people, mostly immigrants from the east who are in the mistaken belief that everything is free. However, pensioners are better off as their income is regulated by the amount of years contributed and the income averaged over time. There is a minimum akin to a minimum income with topups such as accommodation suppliment. The biggest drag at the moment is the access on this system from people who came from the east recently with the same rights as the ones contributing (EU law). Naturally, people are up in arms about this.
              Education – the recent comparision is not the best against Stanford. But everybody has a minimum level that allows them to progress (very competitiv!)
              EU is in recession (-2%), Germany and Austria have positive growth.
              Compare all this to the US, the Mekka of Comercialism and Consumerism where there are so many poor people that one is really surprised. But manufacturing seem to grow.
              All in all, NZ has so far managed to walk the fine line of a balanced system, albeit no one seem to be safe from some idiot ideas that find their way into mainstream uncontested. Selling Assets is not really an option if people wont be able to earn indexed incomes and more effort is needed to bild a better public transport system. Just my 5 cents.

              • Colonial Viper

                Thanks for the detailed report. Enjoy your travels!

              • rosy

                Hi Foreign Waka… Agree with a lot of what you say – except health care, it’s not the most efficient system, but being quite a high user of it myself at the moment, I know it’s not rationed – especially in comparison to NZ. It probably needs to be (I’m waiting for them to work out how much I’m costing and revoke our residency – only half joking).

                I do believe it’s the Austrian focus on employment and local business, including their laws and regulations, that has kept Austria out of recession, so far.

                With the accommodation costs – I haven’t heard of top-ups, but I do know there are rent controls and a fair bit of state housing that help the poor keep their costs down. It’s a pretty good example of how a social democracy can work.

                • Foreign Waka

                  Hi Rosy
                  Hope you get better soon.
                  For any exemption of payments – if the pension is not meeting the minimum living amount – an application can be filed at the county social office. Fill in an application and if all details are correct, excemptions should apply. As for the health system, it apears for the locals to be rationed as access can take a long time. Relatives of mine have told me that it is not as easy as it used to be. One family member paid for his MRI in order to speed up diagnosis as he needs an operation on his knee.
                  Austrians have learned through History, wars, dictatorships, civil war, hunger and dispair that inequality can only be streched to a certain point. After that all bets are off. It was after the second world war that the unions and the government has formed an agreement that is based on ‘social peace and coherance’. This has allowed a realative equal growth in wealth (no poor paupers falling through the cracks and fair pay for all). However, this is now being slowly eroded by casualisation of the workforce, main problem is the outsourcing to the former eastern block countries. Its becoming more and more so that, not unlike NZ, the young ones cannot afford housing and stay with their parents until the age of 30 and over.
                  So not all is well in good all Europe, albeit the waelth distribution still seems to be fairer.

                  • rosy

                    Thanks for the wishes, although my condition is chronic so I’ve had a bit of experience of health care systems in NZ and Austria. And yes, I understand that the locals might see deterioration in services, but compared to NZ waiting times and service barriers due to cost – even at the primary care level – Austria does still have more responsive health care. But oh dear, they could save a lot of money by improving administration!

                    And yes, it would be awful to see social peace and coherence model regress any further, it appears to have been extremely important in creating the laws and regulations that have lead to a good level of development and relative equality. I’m not sure how the immigration issues will be solved. Hopefully without much more of a rise of the FPO

                    In the area we live they’re attempting to deal with the housing for young people – the council says the apartments have become too big – people trying to get more profit. Two massive apartment blocks in our area alone are being pulled apart and renovated into smaller apartments that are affordable for young people. I hear this is happening in various parts of the city – hopefully it’s a good start. It would be nice if our government was as responsive.

                    • Foreign Waka

                      Hi Rosy
                      Yes, one can hope that NZ would copy some of these processes but somehow I daubt that. If anything, NZ would copy the british with their belief that there are lesser people by nature. Not that I like to discredit all that is british, I really like the Queen. Have a great time in Europe if your health allows this, enjoy the culture. Worth your while to visit the Musems, Concerts (some are free!) and Exhibitions – Klimt year in Vienna Belvedere 🙂

          • Polish Pride 4.4.1.1.2

            No we only need to Nationalise the fractional reserve banking because then we can build the roads and do anything else we like without borrowing.

            But your OTT response was expected because there’s no valid argument not to do what I’m saying and R wingers can’t stnd it when that happens so they try and come out with BS like you just did, like a raving looney running around waving your arms in the air – oh why don’t we just Nationalise everything oh oh oh.

          • Polish Pride 4.4.1.1.3

            Uh most did after private banking well and truly rooted their economies -Iceland prime example!

    • Draco T Bastard 4.5

      That’s a load of bollocks just like everything else that the RWNJs say. The spending is going to be done today, today’s generation is going to be paying for it because other things can’t be done due to that spending and thus the only reason for the government borrowing money is to give a few rich people a government guaranteed income.

    • Georgecom 4.6

      Kong. I agree that for some productive assets spreading the costs through time makes sense.

      However the matter under discussion are RoNS, not productive assets, as some of the RoNs are akin to flushing money down the toilet.

      There is nothing clever about borrowing money, flushing it down the toilet and then asking our children to pay the debt bill.

    • Draco T Bastard 4.7

      I think the last paragraph on this page is most telling.

      “Why can’t the powers that be allocate tokens to projects that the community needs such as a new road? The people that build the new road will get the tokens and be able to spend them into the community. To stop the tokens losing value we can limit the number allocated according to the growth of the goods and services in the community. That way nobody owes anybody anything and we get to produce things the community needs.”

      “Hah, you’ll never be able to convince people to do that” Mr B laughs, “it sounds too much like communism!”

    • mike e 4.8

      primitive primate govts borrow for large infrastructure because they are economically unviable election bribes, think big etc.Toll roads would be and should be the answer for free marketeers like your self.

  5. Wayne 5

    “A whole picture theatre full of transport nerds…everyone hating the motorway programme.” It therefore was hardly representative. Anyone present from the transport industry, trucking companies, the AA?

    Maybe this is why Labour struggles to poll well. It is simply not talking to the millions of New Zealanders who use the roads and want more efficent motoways. After all most Wellingtonians favour the Transmission Gully project, and most people in Auckland and the Waikato want the completion of Auckland – Hamilton Expressway.

    Presumably Mr Twyford supports the Western ring route in Auckland, given that it got the initial go ahead in 2008.

    These are the principal projects in the Highways of National Significance.

    • ad 5.1

      It wasn’t a Party gig. It was for TransportBlog supporters. So yeah absolutely preaching to the converted. But no less fun for it.

    • Draco T Bastard 5.2

      …and most people in Auckland and the Waikato want the completion of Auckland – Hamilton Expressway.

      Actually, most people in Auckland want the CRL.

      In a substantial poll organised by the New Zealand Herald in mid 2011, the tunnel found strong favour among Aucklanders (63% in favour, despite the high price tag)…

      You’re talking out your arse.

      BTW, it’s impossible to make efficient motorways simply because cars are the most inefficient means of transport known. Build roads, induce more traffic resulting in more gridlock and wasted resources.

  6. captain hook 6

    this government is out of control.
    key is watching baseball while the country burns.
    he doesn’t give a shit.

  7. AmaKiwi 7

    A basic lesson in “creating money out of thin air,” i.e., the fractional reserve.

    If you borrow, you borrow FROM someone. They expect to be repaid with interest. Otherwise they won’t lend to you.

    We do not “create money out of thin air.” If the government borrows (i.e., sells government stock), the lenders expect to be repaid.

    A 10% “fractional reserve” means the banks must hold as cash 10% of the money they take in as deposits. I deposit $1,000 in my bank account. My bank lends $900 of my money to my neighbor to buy a car.

    That $900 goes into the car dealer’s account at my bank. My bank lends $810 of that $900 (90% of it) to the corner dairy. The $810 goes into their account at my bank.

    Then my bank lends 90% of the dairy’s deposit (90% of $810 = $729) to another borrower.

    The cycle goes on and on: 90% of 729 = $656. 90% of $656 = $590.45. 90% of $590.45 = $531.44. 90% of $531.44 = $478.30. 90% of $478.30 = $430.47. And so on.

    So far my $1,000 deposit has been re-loaned for $5,126. ($900 + $810 + $729 + $656 + $590.45 + $531.44 + $478.30 + $430.47 = $5,126). And we are barely halfway through my original deposit.

    Banks ONLY make money if they can lend. They get a cut on every loan (the interest they charge the borrower). If they cannot lend, banks would be little more than glorified safe deposit boxes.

    Banks are SUPPOSED to be careful and only lend to people who can repay. If someone can’t repay and the bank loses money the loss is SUPPOSED to cost that bank’s owners (shareholders). The problem comes (2008-2009) when every bank is making loans to NIJA borrowers, borrowers with “No Income, Job, Assets.” A whole bunch of NIJA borrowers defaulted. A lot of “supposedly” blue ribbon banks we going to the wall because they were greedy and go addicted to those high interest NIJA loans. Governments bailed out many of the banks. (Lehman collapsed because it had only $1 in cash on hand for every $43 in loans. But most of the other players were only marginally better: $1 in cash on hand for every $20 to $25 in loans.)

    In NZ we don’t have enough people depositing money relative to what other New Zealanders are borrowing. Half of New Zealanders have more debts than they have assets. So our banks borrow from overseas about two-thirds of the money they lend.

    If overseas banks stop lending to us or demand higher interest rates (because we are defaulting on our loans), we are screwed. Will it happen? You figure it out. Over the past 30 years only three OECD countries have NEVER had a positive balance of trade. (Sold more overseas than they bought from overseas.) One of them is Greece. The second is NEW ZEALAND.

    Our government basks in the glory of not having a lot of crown debt compared to other countries. But our personal and corporate debts are staggering. If our economy does not turn up fast, we are screwed. More people will default on loans. Our banks won’t have money to lend to solid customers for essentials we need from overseas! It’s another credit crisis.

    I don’t usually write long threads, but we need some serious public education on this subject.

    This debt problem is potentially devastating. People need to understand why.

    • vto 7.1

      I think you have that wrong annakiwi.

      With your original deposit of $1,000, that becomes the 10%. As such the bank can lend out $10,000, not $900. And that $10,000 is simply ink on paper.

      The situation is m,uch worse than you have outlined. As I understand it.

      • AmaKiwi 7.1.1

        Damn, I knew I should have had my morning coffee before I wrote this!

      • Ben 7.1.2

        Another bit that’s missed but worth mentioning:
        When money is created for the purposes of a loan, ONLY the principle sum is created.

        Say you buy a house and borrow $100,000 at 10% interest (to make it easy). If that interest remains stable over the 30 year term of the loan, you will pay (in total) $315,925.77 – a total interest cost of $215,925.77.

        So the bank created $100,000 – so that money “exists” – but the money which must be repaid as interest is not created.

        This is a problem. For sake of argument, let’s say that the $100,000 principle amount represented all the money in the financial system. You now have a situation in which the amount expected to be repaid is more than three times the amount of money which actually exists. The only way to create that money is for a bank, somewhere, to create it as debt (which also incurs interest, and so we end up repeating the cycle over again).

        If the banks don’t create money, there is not enough money in the system to repay all of the “promissory notes” (read: loans) in the system.

        Our entire economy is based on money created as debt. If the banks stop lending, the entire system will collapse.

        How economists can possibly think they can model an economy accurately while ignoring the function of banks dumbfounds me.

      • mike e 7.1.3

        Merril lynch where John key laundered money their lending ratio was for every dollar on deposit they lent 38 times that amount not 9 times in your example now banks in Australia have been forced to retain 40% of capital against their will.

    • Polish Pride 7.2

      Nothing that shifting to an RBE wouldn’t fix 🙂

  8. AmaKiwi 8

    Our problem today is that the world, and we New Zealanders, owe far more money than we can repay in our grandchildren’s lifetimes. “Free market capitalism” has looked great for the last 5 decades because we were all living on credit. Hell, I’d look prosperous, too, if I spent three times what I earn.

    Now the bubble is bursting everywhere. If the debt cannot be repaid two things happen:

    1. The lenders foreclose and take whatever collateral there is; and/or
    2. The collateral isn’t enough to cover the loan so the banks lose money or even go bust.

    In personal terms that means if you are a debtor, you lose your major possessions. If you are a lender, you lose your money in the bank. That destroys businesses and countries’ budgets which means we are out of work. The only winners are the very rich who buy up your possessions very, very cheaply.

    Against this backdrop National is selling our infrastructure before prices drop lower AND making you and me more indebted.

    “A brighter future with National. Yeah right.”

    “The only winners are the very rich who buy up your possessions very, very cheaply.” That couldn’t be my beloved PM. “Yeah right.”

    • mike 8.1

      ““The only winners are the very rich who buy up your possessions very, very cheaply.” That couldn’t be my beloved PM. “Yeah right.””

      Nooooo not my John John.

      “Ordinariness is his helium. We push him up to prove that we, too, can rise.

      The Prime Minister is said to practise the politics of aspiration. To aspire is to breathe out, to reach up, to soar.

      John Key bounces from cloud to cloud on the warm updrafts of his nation’s confidence; on New Zealanders’ desperate conviction that politics can be, and should be, the province of ordinary men and women.”

      AmaKiwi a currency trading Merrill Lynch bigwig banker would never do such a thing.

    • Georgecom 8.2

      Based on your comments, it’d be interesting to see how many of the ‘mum and dad’ shares end up in the ‘blind’ trusts of, oh lets see, Prime Ministers or Ministerts of Finance?

      It’d be interesting to review the spread of shares in the privatised state assets in 5 years time, see exactly how many have been snapped up by current Government MPs.

  9. Draco T Bastard 9

    National’s doing the exact opposite: selling valuable assets to avoid low-cost debt, then taking on about the same amount of debt to build motorways that are worse than worthless, with costs that exceed their benefits.

    And that is the proof that NACT aren’t selling our assets for the benefit of NZ.

  10. captain hook 10

    john key is a money trader.
    he only knows how to make money on the ‘turn’ and by ramping or churning.
    that is what is happening here and guess who is paying for it?

  11. AmaKiwi 11

    National is selling our infrastructure. “Assets” sounds like an innocent spreadsheet entry. Infrastructure is the heart and lungs which the country needs to breathe.

    The Greek infrastructure up for sale by National’s idealogical compatriots includes power plants, water supplies, roads, bridges, harbors, public transport, schools, hospitals, as well as some of the country’s finest historical landmarks and best public beaches.

    “National would never do that. Yeah right.”

  12. xtasy 12

    Red an economic, high ranking report last week:

    Debt can be a problem, but it is all a matter of perspective. If a n economy’s wealth and prospect to grow is taken into account even a total GDP debt of 200 pc like in Japan is not that serious and manageable! So who owns and owes the debt may be more important than the total debt!

    NZ is safe!!!

  13. jack 13

    Who are we borrowing from? Key’s mates? If that is the case, then you have your answer.

  14. Draco T Bastard 14

    http://transportblog.co.nz/2012/08/17/nzta-spends-8m-on-rons-promotion/

    “The Government has been concerned that a lack of ‘messaging clarity’ would undermine the credibility of the $12 billion so called “Roads of National Significance” spend up”, says Silvia Zuur, Smart Transport coordinator.

    A huge amount of public money has been invested to try and manufacture consent for the RoNS, despite the government’s own commissioned SAHA report confirming their minimal economic benefit.

    “With instructions such as: ‘Lack of messaging clarity may undermine the credibility of the programme or leave the way open for critics’ these documents make clear that the government has been preoccupied with neutralizing opposition to the RoNS, rather than evaluating their value to taxpayers and communities”, says Ms Zuur.

    Puhoi to Wellsford $1,671,552
    Waikato $1,089,595
    Western Ring Route and Waterview Connection $1,070,000
    Victoria Park Tunnel $1,089,565
    Tauranga Eastern Link $268,558
    Wellington Northern Corridor $3,080,247
    Christchurch Motorways $154,882

    TOTAL $8,424,399

    No wonder they’re having to borrow money to build the bloody things – they’re wasting millions trying to persuade us that these lemons are actually good for us.

  15. Jenny 15

    Look at the Victoria Park tunnel. A complete fiasco. That has resulted in huge jam ups for commuters trying to leave the city centre to get over the bridge.

    What was the point?

    400 metres of hugely exspenive tunnel under a skateboard park?

    Pointlessly dragging an ancient old pub up the road and back again.

    For what?

    To fill the pockets of the roading contractors.

    There is no other reason for this idiocy. It has not decreased traffic congestion in the city one iota, instead made it worse.

    And now they want to repeat this fiasco in Waterview but on a much bigger scale.

    For a fraction of the cost of the Waterview White Elephant we could greatly improve public transport across the city. Goodness knows Auckland is crying out for it.

    I suppose public transport will just have to wait until the roading lobby has finished feeding at the trough.

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