The bulk of New Zealand's debt is in housing. Photo / File
The bulk of New Zealand's debt is in housing. Photo / File
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
In the first quarter of the year, the world's borrowers piled on another US$3 trillion ($4.4t) to take the grand tally of debt to US$246 trillion, according to the Institute of International Finance (IIF).
We collectively took a pause in 2018. Aftera US$21 trillion borrowing spree in 2017 we only added US$3 trillion to the debt mountain in 2018.
The world is so indebted now that central banks can't make borrowing more expensive or the whole system will seize.
We're in stuck a global debt spiral with numbers that just look worse and worse.
Big numbers can look deceptively alarming. There's a lot of people in the world and a lot of wealth.
But the IIF estimates that total represents almost 320 per cent of global economic output.
New Zealand's household debt to GDP ratio is about 94 per cent of GDP, although if you look at the total gross debt mountain, including household, business, farm debt, Government and local government debt, it's closer to 200 per cent GDP.
Not too bad, but New Zealand wins - as usual - on a per capita basis.
Out total gross debt of $571b translates to about $112,000 per New Zealander.
Globally the share of gross debt per person works out at about $47,000 each.
Globally corporate debt also makes up the biggest chunk of the grand total, followed closely by government borrowing, with household debt a distant third.
In New Zealand, household debt dominates the statistics, making us more vulnerable at an individual level.
After a while the numbers start to look a bit meaningless.
Who do we owe all this money to? Who's keeping count?
The global financial system is effectively a vast ledger that exists in our collective imagination.
We can rest assured that the entire financial system is now geared towards managing that debt mountain.
We're good, as long as nobody panics. If they do, then watch out, we'll be in for an almighty financial crisis.
Debt isn't inherently good or bad.
Global debt is rising. Photo / 123RF
The moral judgments we make about it are subjective - based on cultural and personal biases.
It's one of the great human inventions. It allows us to have things now, using wealth we'll have in the future.
It adds huge value to our lives when viewed against the short period of time we get on this Earth.
Yet we hold strong cultural aversions. We find something about the obligation distasteful.
Neither a borrower nor a lender be, says Polonius in Shakespeare's Hamlet.
That sentiment is rooted in a religious distrust. The Bible and Quran frown on "usury" or the business of lending.
We love to bash the banks - we treat them like drug pushers.
Financial advisors talk about good debt - the kind where you use the money to invest in something that appreciates in value at a greater rate than the cost of the loan.
It's considered abnormal to buy a house or run a business without some debt.
Ideally we should run debt levels that reflect our risk appetite and our confidence in the future.
New Zealand's richest man Graeme Hart has never been afraid of debt. He's borrowed billions, always backing himself to beat the price of that debt with the returns on his investments.
When I look at my own personal finances, I suspect I'm overly risk averse.
If I had borrowed a lot more to invest in property or shares over the past decade I might have ended up bankrupt.
But probably not, I'd probably be a lot wealthier.
Economists are making a strong case for the New Zealand government to borrow more now, to invest in infrastructure and social service - to be more confident in the nation's future.
Successive New Zealand finance ministers have been risk averse.
Personally I share their bias, although I accept it's debatable whether that is right basis for running a country.
Borrowing at low rates for projects that boost the economy makes a lot of sense - if you trust governments to invest wisely.
Fiscally cautious: Finance Minister Grant Robertson during his Budget 2019 presentation, Wellington. Photo / Mark Mitchell
Sadly, New Zealanders' scepticism about politicians looks like the biggest constraint on public borrowing. That attitude isn't shifting fast.
Meanwhile, what worries the Reserve Bank isn't our total gross debt. It is the concentration of debt.
The bulk of our debt is in housing and falls largely on a younger segment of our population.
The other area of risk is dairy industry debt, which burdens our largest export industry.
In both cases that burden has become onerous. It now limits our choices and makes us vulnerable to economic forces beyond our control.
As with most things, it is a question of balance.
We need to shift our debt ratios in housing and agriculture. We need to do that before we face a crisis of confidence, or worse - our creditors do.
But neither should we retreat from economic opportunity or lose confidence in our ability to create wealth.
We shouldn't fear debt or give up on it as an economic tool.
