KEY POINTS:
With the world in the grip of a credit crunch the country's conspicuously large current account deficit may prove to be its Achilles heel.
The deficit is essentially our net income from trade and investment with the rest of the world, and relative to the size of the
economy it is the third largest among developed countries at 8.2 per cent of GDP (for the year ended September 2007).
The cumulative effect of 33 straight years of deficits is that foreign claims on the New Zealand economy total over a quarter of a trillion dollars ($269 billion to be precise) or a net $151 billion when offset by New Zealand investment offshore.
And most of it is debt, which of course has to be repaid, rather than equity whose owners take their chances.
At a time when the world's lenders have flipped from being pretty relaxed to distinctly risk-averse, this is not a comfortable position to be in.
The risk is that foreign lenders suddenly lose their appetite for New Zealand dollar debt and have to be coaxed by much higher interest rates to fund both the fresh deficit and the portion of the existing debt that is rolling over.
The risk is not so much that the local borrower will default, but rather that when the loan gets repaid the exchange rate will have moved against the lender.
The banks are adept at peeling the foreign exchange risk off their liabilities, but the system depends on someone else being willing to hold it.
As a money market dealer put it once, "the market doesn't care about the current account - right up to the point when it decides it does".
Not everyone agrees that the current account is a problem or that, if it is, the seat of the problem is improvident behaviour by households. But the Finance Minister does. Michael Cullen regularly insists KiwiSaver will help correct an "unacceptably" high current account deficit.
And the Governor of the Reserve Bank does too. Alan Bollard last Friday said the decline in household saving accounted for a large part of the decline in total national saving (household plus business plus government saving) across the advanced economies.
The advanced economies in general were saving too little relative to their current levels of investment, while emerging economies were saving too much, he said.
"China and other emerging markets are essentially funding the consumption of consumers in the advanced economies."
The contrary view is advanced in a paper by Bryce Wilkinson of Capital Economics and Trinh Le of the NZ Institute of Economic Research, "Is poor household saving the cause of New Zealand's high current account deficit?"
They remind us that the current account deficit is investment (net of depreciation) minus national saving.
Whether a rise in national saving reduced the current account deficit would depend on what happened to investment.
And whether a rise in household saving reduced the deficit would also depend on what happened to saving by the corporate and government sectors at the same time.
A concern that the deficit in the current account of the balance of payments is too high must also be a concern that the corresponding surplus in the capital account is too high, they argue.
"To justify this concern a case must be made that overseas savers are investing too heavily in New Zealand for some reason. After all, if they thought New Zealanders were getting themselves too heavily into debt they would lend less, the exchange rate might fall, production might shift to tradeables, and spending, including on investment, might fall."
But this is reminiscent of a story about Sir Robert Muldoon.
"Prime Minister, are we spending enough on defence?" he was asked. "Of course we are. If it wasn't enough we would be spending more," he replied.
It is unconvincing in the same way to argue that foreign lenders can't be pouring too much money into New Zealand because if it was too much they wouldn't be doing it.
Looking at data from 21 developed countries over 38 years, Wilkinson and Le found the correlation between current account balances and household savings rates was virtually zero. (New Zealand is not included in the OECD data, apparently because its household savings rate data is considered too unreliable).
In some countries, including the United States, the two have historically been strongly correlated while in others, including Japan and Canada, they moved in opposite directions.
But it is one thing to point out that as a general rule the current account deficit does not necessarily reflect households' dis-saving.
That doesn't rule out the possibility that here and now it does.
It is hard to see exactly what else it could be.
The Government runs surpluses of politically embarrassing proportions.
And the business sector, to judge by our listed companies, is not reporting the kind of haemorrhagic losses and hollowed out balance sheets that might account for a national deficit of over $14 billion in the year ended September. Quite the contrary.
That only leaves households.
Even so, Wilkinson says, it doesn't mean it is the symptom of some "pathology".
He points to work by two Reserve Bank economists, Anella Munro and Rishab Sethi, last year which concluded that most of the big deterioration in the current account between 2001 and 2005 could be explained by people responding rationally to prevailing economic conditions.
In particular they looked at the low world cost of capital, new technology (which encourages investment in order to boost labour productivity), and the strong exchange rate (making imports cheaper and exports less rewarding).
According to the national accounts for the years to March 2006 and 2007, investment in the economy (gross fixed capital formation in both the private and public sectors, net of depreciation) was around $30 billion.
But only 12 per cent of that was funded from national saving. The rest was financed by imported capital, the flipside of those years' hefty current account deficits.
Clearly, access to the world's capital markets allows the economy to grow a lot faster than it would without it. Equally clearly, the returns from that capital flow to its foreign suppliers.
We benefit from the investment through spillover effects, Wilkinson says, but the real point is that it may be cheaper to get foreigners to fund the investment than to forgo consumption and increase our own saving.
"That's a judgment for people to make. It's not one for governments to make because they don't know what the benefits to people are of continuing to spend on whatever they are spending their money on," he said.
"It comes down to whether New Zealanders in the large and on average are getting it wrong. Does Alan Bollard really think he is competent to tell that?"