KEY POINTS:
Reserve Bank Governor Alan Bollard and Treasury Secretary John Whitehead have been away on a roadshow this week taking in the world's major financial capitals.
Their message, one imagines, boils down to this: "Please keep lending us Kiwis money. We're good for it. We have problems, but these
days who doesn't? All in all we are in better shape than you Northern Hemisphere guys."
It is intended to blaze a trail for our bankers, who get upwards of a third of their funds from overseas sources, to follow.
It is an ironic contrast to a mission officials undertook three years ago when the aim was the exact opposite, to curb Japanese investors' enthusiasm for uridashis.
Uridashis are retail debt instruments denominated in New Zealand dollars and paying New Zealand level interest rates. They have been part of a complex system by which the banks slurped up cheap money overseas with which to fuel the housing boom here, frustrating in the process Bollard's attempts to rein it in.
Let's hope this time they are more successful. But it is not an edifying spectacle.
That it is necessary at all reflects the fact that we are grappling with two economic problems at the same time, an acute one and a chronic one.
The acute one is, of course, a recession. It began a year ago for entirely local reasons but has now been subsumed into the most severe global slump of the post-war era.
The chronic problem is our longstanding habit of living beyond our means.
Our productivity levels and output per capita position us in the bottom third of the OECD. But we like to live as if we were still in the top third.
We borrow the difference from the rest of the world, but now its willingness to keep on letting us do so is hanging by a thread.
If you look at the structural problem, what needs to be done is fairly clear.
We need to save more and spend less. We need to invest more and consume less. We need to export more and import less. And the last thing we need is a big increase in Government debt piled on top of what the household sector has run up already.
But if you look at the immediate cyclical problem what is needed is very different, and in many ways contradictory.
We need to spend more. Consumer spending is flatlining or worse. Each successive quarter last year recorded lower real retail sales than the one before.
Household sector debt levels over the last quarter of 2008 essentially stopped growing.
The December quarterly survey of business opinion was a shocker.
It certainly does not augur well for business investment or employment.
In response to this implosion of demand we have seen fiscal policy flip from being contractionary to being very stimulatory by historical and international standards.
We have also seen very aggressive easing by the Reserve Bank, slashing 475 basis points off the official cash rate and foreshadowing more to come.
But as governor Alan Bollard said last Thursday you can have stimulatory conditions without stimulation, if people are unwilling to spend or banks are unwilling to lend.
Hence his call for households and firms not to "pull down the shutters" and for banks to continue to lend when presented with sound business propositions.
Heeding these pleas to spend more is liable to make the country's trade gap wider, however. Exporters face a year in which, according to the International Monetary Fund, world trade is expected to actually shrink. Unheard of.
And the risks of protectionism are rising all the time.
Bollard acknowledges that as a nation and as a people we do need to save more. But not all at once right now please.
The same tension between what is necessary in the short term and what is sustainable in the longer term applies to the Government's finances.
With every other component of the demand side of the economy under pressure - private consumption, business investment, residential construction and net exports - it is a no-brainer for Government spending to fill as much of the breach as it can.
But the Treasury estimates gross Government debt could soar from $31 billion in June last year to $81 billion by 2013 - the combined effect of a switch to a seriously stimulatory fiscal policy and the hit to tax revenue growth from the recession.
At normal bond yields that would add over $3 billion a year to the Government's expenses, and who can't think of better things to do with that sort of money?
It also represents a rise in the gross debt-to-GDP ratio from 17 per cent now to a much less virtuous 38 per cent.
That might not be too bad by the standards of other developed countries. But put it in the context of New Zealand's conspicuous net international debtor position - more than 90 per cent of GDP, second only to Iceland - and it is not a good look.
Hence last month's warning of a potential downgrade of the sovereign debt rating by Standard and Poor's which is both a proxy for, and guide of, offshore investor sentiment.
There is a limit to how much Bollard and Whitehead can be expected to counter those concerns in the market. That task falls to Finance Minister Bill English, whose first Budget will have to both satisfy a domestic audience that the Government is doing all it can to "take the sharp edges off" the recession, while delivering the "credible plan" S&P is looking for that the steeply rising Crown debt track will start to bend down again in the medium term.
In this environment economic policy initiatives, like those announced yesterday aimed at the small and medium enterprises sector, are liable to involve a lot of fanfare and sentiment-boosting rhetoric - but not a huge fiscal cost.
But all the same they will be useful at the margin in fostering a revival in businesses' willingness to borrow, to invest and to employ.
