KEY POINTS:
In politics, a week can be a long time. One month, though, is an eternity in the global economy.
Consider September. In that fateful month we saw the bail-out and/or collapse of five of America's biggest financial institutions - Freddie Mac and Fannie Mae, Merrill Lynch, Lehman Brothers
and AIG, one of the world's biggest insurers. To boot, the US Government threw its banking industry a US$700 billion (NZD$1.1 trillion) lifeline. This, remember, was the industry that was making record profits until 18 months ago.
Now take October. Already most, not just some, of Britain's big banks have been guaranteed a US$835 billion cushion courtesy of the taxpayer. One of them, the very same Royal Bank of Scotland that was hailed in 2007 as Britain's most enterprising institution for engineering the takeover of ABN Amro, is now under the protective wing of the UK Government. Along with September's rescue of Halifax Bank of Scotland by Lloyds TSB, Scotland has overnight lost a banking industry that took the best part of 200 years to establish. The UK banking system - the one which Prime Minister Gordon Brown saw until recently as virtually the nation's cash cow - is now pretty much nationalised and likely to stay that way for years.
Across the Channel, it's nearly as bad. Germany has had to come up with a US$400 billion rescue package for what was supposedly an industry of almost boring conservatism. Several of Spain's banks are in trouble.
And right here, Australia and New Zealand have had to guarantee deposits to insure against a run on the banks. Anybody suggesting the very possibility of any of these events even six months ago would have been laughed out of court.
Yet October is barely half-over. What next? In every single month since this financial meltdown began in August 2007, the overwhelming consensus of opinion was that "the worst is behind us". Instead we have seen a series of ever greater shocks.
And when the wreckage finally settles, where does it leave a highly vulnerable New Zealand sitting at the bottom of the world, its dollar kicked around by the carry trade, and at the mercy of world markets that are already in decline?
Beyond a shadow of doubt, the global economy has shifted on its axis. New Zealand's world has changed for the worse and it's time to re-examine the nation's place in it.
Two years ago when I started writing The Great Crash, a new history of the implosion of Wall Street in 1929 and the resulting global slump, none of the above events was considered possible. Indeed they were unthinkable. The world was swimming along on a tide of seeming prosperity. The chief executive officer of a major bank told me during my research: "Of course, the world is very different now from the thirties."
Actually, not that much. The "roaring twenties" that preceded the Depression was the first great age of consumer and corporate debt, and we've just seen off the second. In both periods the banking sector succeeded in slipping the regulators' leash, with disastrous consequences. Adjusted for the scale of the economy of the time, comparable volumes of investment and savings have been destroyed; upwards of US$3 trillion has already been vaporised in this latest meltdown, according to Boston Consulting.
And inevitably, the damage has started to flow through to the real economy, just as it did in the thirties. It will take years for the banks and the economy to be recapitalised and recover.
Much more than mere financial cataclysms, the Wall Street Crash of '29 and the Depression were social events that transformed lives right across the world, generally for ill. Then as now, they hit the smallest and most vulnerable nations the hardest. At the time New Zealand's two million people made up the smallest of the Empire nations, Newfoundland excepted.
I wrote in The Great Crash about New Zealand: "As overseas earnings declined in the general blockade of trade, men were being laid off meat-slaughtering lines in giant meat freezing works, woollen mills slowed to half-pace. Ships started to leave the ports half-empty, state-owned railways freighted less and less cargo. Dairy factories processed less milk." (As for poor Newfoundland, it went bankrupt because of the collapse of markets for its staple export of dried cod and had to be rescued by a Britain that could ill afford it.)
Do we face another Depression?
Highly unlikely, in the sense of people going hungry or being put on forced labour schemes. But this latest debacle certainly affords a unique chance for New Zealand to address its vulnerability.
First there are immediate problems. As most manufacturers well know, small and exposed economies, like New Zealand's, live off trade and our trade is already in decline. Many of our businesses are exposed to Australia, whose prime minister predicts "tough times ahead" - translated, a slowing economy with important implications for New Zealand. As the head of one of our largest producers remarked years ago, it wouldn't make any difference to the shelves of the world's supermarkets if New Zealand disappeared off the face of the globe because the space would quickly be taken up by rivals. "Except, possibly, for Marmite", he half-joked. With export competition growing fiercer by the year, little has changed since then.
On top of this, the Asian economic hub is rapidly acquiring skills, infrastructure and capital that threaten our manufacturers. As treasury secretary John Whitehead pointed out earlier this year, producers in India, for example, have the extra advantage of making fat profits from domestic markets that dwarf New Zealand's.
The Government has a vague plan to boost exports to 40 per cent of GDP by 2020, but that's 12 years away and time isn't on our side.
Then there's New Zealand's debt. As Iceland, now seeking a lifeline from the International Monetary Fund and considering a bail-out offer from Russia, knows all too well, small nations need the security of low debt because it serves as a buffer in hard times such as now when New Zealand is officially in recession. (Incidentally, that unfortunate event got reported right around the world.)
With a net international debt equivalent to 89 per cent of GDP and interest payments rising rather rapidly, New Zealand's debt is considered too high and, as such, threatens Labour's classic pump-priming plan of an infrastructure-building programme to help rescue the economy.
The Kiwi dollar is worryingly vulnerable, as the Reserve Bank, among other authorities, has repeatedly warned. Effectively, control of the currency has passed to outside forces, as UK-based, New Zealand economist Robert Wade has pointed out.
Although Labour has promised to protect the Kiwi dollar from "undue volatility", it's hard to see how. If it does, perhaps the finance minister should pass on this know-how to his counterparts in Australia, the Eurozone, Russia and even the US, all of whom have suffered alarming shifts in the value of their currencies.
Now may be the time to abandon misplaced notions of patriotism and revive the nineties debate about linking the Kiwi with the much stronger, resource-based Aussie dollar.
Longer-term, we suffer from a veritable host of problems. By definition, ours is not a robust economy. It could hardly be otherwise because of its size and dependency on bigger nations. But low savings, low investment in financial assets and a world-leading love of houses - a sector now showing the weakest sales in a quarter century - certainly don't help.
We can't be like Britain which, despite its enormous debt, can be counted a robust economy because of its diversity and proximity to markets. Ridiculous as it may seem, we're actually more like Russia, despite its US$55bn in foreign exchange reserves. President Medvedev's nation suffers from an ageing population, low productivity, dependency on a handful of export products, notably energy, great distances from its main markets, a lifestyle it cannot afford, and a currency that outsiders don't trust.
Our productivity, which can be described as the ability to extract more bang for the investment buck, is worryingly below the best international standards. (In part because of its world-beating productivity, America will bounce back from this crisis far faster than will New Zealand, despite being the epicentre of it.)
Treasury has fretted about this for years, and with good reason. As American Paul Krugman, who has just won the Nobel Prize for economics, puts it, "productivity isn't everything, but in the long run it's nearly everything".
Treasury secretary Whitehead explains: "Our capacity to raise our standard of living depends on our ability to raise output per worker - the amount of goods and services each worker produces and the value they add." One of the long-term contradictions about us is the way we expect the All Blacks and other athletes to beat the world while being content with B-grade productivity.
Robust economies need powerful friends. British management guru Charles Handy once told me it was vital for New Zealand, a country he knows well, to form long-term connections with bigger nations other than Australia. Just one advantage of this would be access to deeper investment markets, given our dearth of venture and other forms of capital. There aren't enough businesses like Phil and Ted's Most Excellent Buggy Company.
While helpful, Labour's promise to "increase international connections" comes very late in the day. (It's what our tourism operators have been doing for decades. Where would the economy be without it?).
As Handy suggests, because we're so far off the beaten track, New Zealand needs to take specific steps to combat our natural insularity by being outward-looking in practically everything we do. We are not, for instance, good at languages, to put it mildly, even though this is considered essential in building, long-term trading relationships.
New Zealand continues to cherish dated social myths such as the notion of egalitarianism that has often revealed itself in antagonism for the very wealthy (although they may sometimes have asked for it). Even socialist Britain praises its annual Rich List, most of whose occupants, incidentally, are self-made. All we can hope to provide, the prevailing European socialism would argue, is equal opportunities rather than equal outcomes.
Once the dust settles, the current upheaval gives New Zealand a window of opportunity for this kind of debate. As a Kiwi who has spent half his life abroad, it seems to me that the nation starts with enormous goodwill offshore and punches far above its weight. People seem to like us, Kiwis abroad are valued for their work ethic, and I've never met a visitor who didn't think New Zealand was one of the best places they'd ever been to.
But this crisis has a way to run yet and little nations at the bottom of the world, like Iceland at the top, are highly vulnerable.
New Zealand author Selwyn Parker's latest book, The Great Crash (published by Little, Brown), has just been released in the UK. It is due for release in NZ by Hachette Livre in December - RRP $40