Elizabeth Kerr wants you to know what economic commentators mean when they refer to the next GFC

By Elizabeth Kerr

What happens if you spend more money than you earn? You know the answer, right? … eventually you have to buckle down and pay it back.

It doesn’t matter if you’re a household, a business, a government or a bank. *sigh* Okay maybe not if you’re a bank …

There are some whispers of a new GFC about to start late this year from economic commentators around the world. The problem is that without a PhD in Economics majoring in linguistics it’s almost impossible to make out what they trying to tell us all.

So to help break it down this is the Elizabeth Kerr version of what you need to know about the GFC2.

Like all good sequels it promises to have more blood, more gore and more despair for all our favourite characters.

So What Are Economic Commentators Trying To Tell Us?

Global Debt levels are too high – The countries that make up the global economy already have massive personal loans in place for spending that they have already made in the past, not to mention the extra loans they had to take out to get through the last GFC. The total amount of debt floating around the world as of 2015 is about $200 trillion (12 zeros if you’re wondering) and increase of $57 trillion since 2007.

The last GFC did not force people to pay back debt, instead governments printed some more money and we all just took out a few consolidation loans and kept spending.

And what’s worse, that debt was so cheap that nobody stopped to think about how they were going to pay it back – they figured they’d sort that bit out later when they had some extra money floating about.  (Doesn’t that sound familiar *wink*)

Global Budget Deficits are too wide – You’ll hear this lots as well.

Each economy doesn’t have enough money coming in from their day-jobs to meet all their expenses – let alone pay down the debt on their loans.

We all know if we spend more than we earn and can’t pay our loans and credit cards then we’re in big trouble.   A lot of this debt was to get them through the last GFC whilst anticipating that the future was going to be full of sunshine and roses, their incomes would increase and they would be able to pay back those loans.   But it didn’t.   World growth is forecasted for a paltry 2.8% (note: a global recession is activated when growth is just 2.5%).   Everyone say “Eeek”.

What else is hurting us all?

Global Oil Prices Fell. On the face of it as long as it’s cheap at the pump you don’t care right?  Wrong – you need to care about this! 

The countries that produce and sell the oil now don’t get as much income to pay their own expenses, causing them to have to cut back on how much they can buy from everyone else, so then those countries have income issues and have to cut their prices to export their products and everyone looses.  The countries that buy the oil might be getting it cheaper but cheap oil cheapens their economy in the end so it’s a loose-loose situation really.

China’s Debt Too Big for Its Boots. It’s tempting to just blame China for all our woes and there would be very good reason considering it had ownership of approximately $28trillion of that debt in 2014.   Most of this debt is linked to their property (lets not forget the ghost cities), shadow banking (meaning risky loans) and government debt.   When revenue in China falls, paying this debt back is impossible so whilst they have had some boomer years they are currently just scraping by financially and this causes everyone to worry.  China is a big customer to a lot of other countries and buys about $12million of stuff from NZ (2014), second to Australia at $13m.   So we need them stay profitable and keep buying.   The fact that they aren’t causes shock waves around the world, and companies are downgrading their profit estimates as a result.   Cue the start of a global recession via lower stock prices maybe?

So, How Did NZ Get Through The Last GFC?

Well thankfully leading up to the last GFC we had amassed a few budget surpluses and had some money stocked away, like a personal emergency fund (like the one you have right now?!!!)   So they used that to help pay for the rise welfare payments that came about, and to absorb the shortfall of income no longer coming in.   That was handy then but now we don’t have that kind of money saved away so the government would be forced to cut spending/services to see us through.   Imagine a world where our taxes actually increase, taking kids to the doctors is no longer free, and the retirement age has no choice but to go up.   This kind of government spending changes is referred to as austerity measures.

Real Estate Bubble. The last GFC took everyone totally by surprise because Real Estate was considered the safest of investments, until someone peeked under the sub-prime mortgage thing (watch The Big Short to understand that one).   So now the attention is on making sure that doesn’t happen again and one thing in our favour in NZ is the fact that the RBNZ introduced Loan to Value ratios on real estate.   Making sure people had a deposit which was tied to the amount of house that they could purchase was intended to stop people paying super-silly prices for any old dunger.   The benefit of this is that should house prices take a hit hopefully they will not slide below water.   Below water means that a person is paying a loan for a house which is more than the house is actually worth.    This may make some people nervous.   The really low rates of interest being paid on bank savings combined with the very low interest rates on mortgages is all a bit déjàvu don’t you think?   Maybe it’s a good time to consider selling that holiday home you used your equity to purchase in the last 2 years?  Just saying….

The OCR Rates Lever. Lowering the OCR rate essentially makes borrowing money from the bank cheap.   The RBNZ does this so we have more money in our pockets to spend elsewhere (or pay down our debt … But only a few of us actually does this, right?). When goods and services are being purchased our economy hums along nicely. The problem with this is that we’ve pulled that level already and now the rates are already too low at 2.5%.   Everyone say “Eeek”

So folks in closing today we have covered off the following:

  • Big Global Debt
  • Global Budget deficits
  • Falling Oil Prices
  • Chinas declining revenue
  • Corporate Failure
  • Lowering NZ OCR rates
  • NZ Real Estate

There is so much more to this story but the basic message we’re being told is that the math just doesn’t add up to give us any other option. “Winter is coming”. There is going to be a GFC2 but the question on everyone’s lips is WHEN will it hit, and what does this mean for you personally?   It is not necessary to start stock-pilling food and building an underground bunker, but I do want you to think about how this might effect your purchasing decisions and your money machines.  

When do you think, and what can you do to ready yourself?  Comment below or email me at Elizabeth.Kerr@interest.co.nz or find me on Facebook.