either through equity investment by foreigners or by borrowing from overseas. new zealand's foreign liabilities currently outweigh its foreign assets to the tune of $ 124 billion ( 81 per cent of gdp ) a much higher net liability position than in virtually any other developed country. this reflects our long history of running current account deficits. figure 7 : new zealand's net international investment position 3. the adjustment process currently standing at 8 per cent of gdp, new zealand's current account deficit is at levels that cannot be sustained indefinitely. doing so would imply a continued increase in new zealand's indebtedness, 5 / 7 and debt servicing costs, relative to the income available to service that debt ( i. e. its gdp ). history tells us that at some point the deficit will ‘ correct'back to lower levels. the process of current account correction is likely to involve some combination of an expenditure reduction through lower domestic demand and expenditure switching away from imported goods towards locally produced goods and services. it is also likely to involve an increase in exports. such adjustments are likely to be prompted by a lower exchange rate and / or higher interest rates. the transition to a lower current account deficit effectively means reducing new zealand's reliance on foreign savings and increasing the saving we do ourselves. for the household sector, which has been relying heavily on debt in order to finance spending, this adjustment process may not be painless. a correction in the housing market - - a slowing in house price inflation or even an outright fall in prices - is likely to be part of this process. a reduction in the exchange rate from its current high level is likely to be an integral part of the adjustment process. significant parts of the export sector, such as manufacturing and services have been under pressure, while those supplying local markets have faced considerable competition from falling import prices. there also appears to be a growing sense among analysts and commentators that the exchange rate is materially overvalued and that a substantial fall is both desirable and inevitable at some stage in the next couple of years. no one can reliably predict when the exchange rate will decline nor what path it is likely to take. factors outside our control - - including the path of the us dollar - - could have a significant bearing on developments. it should also be emphasised that even once the exchange rate begins to fall, an increase in exports and a reduction in imports will not occur instantaneously. export markets take time to rebuild and consumer buying

, where much more detailed data are available, it is clear that the recent economic performance of states and counties where people took on relatively more debt has been worse than the economic performance in the rest of the country. there are, however, important differences. a crucial difference from, say, the american ( or spanish and irish ) experiences so far is that new zealand house prices have not come down very much, or for very long. the federal reserve recently released data suggesting that median household wealth in the united states fell 40 per cent in the three years to 2010 – and was back to 1992 levels. most of the drop in wealth resulted from a fall in house prices – and house prices in the united states had not risen as much those in new zealand. sharp falls in nominal house prices tend to be much more disruptive, especially to the financial system, than the same fall in real house prices that occurs gradually through a prolonged period of house price inflation running a little lower than general inflation. another important difference is that the government ’ s debt as a share of gdp is still materially lower in new zealand than in many advanced countries. public debt here, and in most advanced countries, has increased substantially since 2008, but our starting point was so much lower than most. new zealand avoided the sort of systemic financial crisis, and associated bank bailout costs, that has resulted in significant additional public debt being taken on in a growing number of countries. it is, however, widely accepted, here and abroad, that ongoing fiscal deficits are now mostly structural in nature. authorities cannot just wait for time and normal economic recovery : only concrete policy choices will close the deficits, although of course there is lively debate as to just how rapidly that should be done. factors that help explain the tepid recovery why, then, are so many countries, even ones like new zealand that avoided both a systemic financial crisis and the difficulties of a common currency area, still experiencing such a tepid recovery? we cannot be definitive but, in addition to the current idiosyncratic pressures in europe, three factors seem to be at least part of the story : • first, the very widespread nature of the 2000s credit boom and the resulting overhang. consider, by contrast, the experience after japan ’ s credit and property boom in the 1980s. many talk of japan ’ s “ lost decade ” – but per capita gdp in japan fell only slightly and briefly in the early 1990s, and its per capita growth and productivity ( gdp