Analysis by Keith Rankin.
Role: Economic historian.
Keith Rankin, 3 July 2026 – Last week I posted these two charts (Terms of Trade and Import Volumes) which presented, for New Zealand, a long-run view of two critically important (though under-reported) economic indicators. The terms of trade chart suggests that New Zealand has enjoyed unprecedented boom-times this century. The imports chart confirms this, revealing that – for more than three decades, starting in 1986 – import volumes increased by six percent per year; that is, import volumes have grown much faster than the New Zealand economy has grown.
(For New Zealand’s economic growth since 1990, see my NZ Economic Growth over the Medium Term Scoop 2 July 2026.)
In my text (see New Zealand Economy: Boom or Bust in Early 2026? Scoop 25 June 2026) I noted that, in 1985, a year before the dramatic change in New Zealand’s terms-of-trade fortune, New Zealand’s new political class launched a financial scheme – effectively creating an entity which might have been called New Zealand Financial Incorporated 1985 Ltd. The New Zealand economy then became – at least in significant part – a successful Ponzi scheme.
As we can tell from the case of the Icelandic national Ponzi scheme (associated with the regime of Prime Minister Geir Haarde) which began in the mid-2000s and ended late in 2008, the New Zealand scheme might have been equally short-lived. New Zealand’s scheme was rescued more by good luck (a terms-of-trade turnaround, starting with the substantial 1986 fall in global oil prices) and by a suite of foreign purchases of New Zealand assets accelerating in 1989. (New Zealand import volumes were 29% higher in the year-to-June 1990 than three years earlier; and, through the following deep recession, imports held up over the next three years.)
The principal feature of a Ponzi scheme is the promise, to investors, of high interest rates.
A Ponzi scheme is a consumption mechanism which masquerades as an investment portfolio. To fully understand what a Ponzi scheme is, it is necessary to know what isn’t a Ponzi scheme. A useful metaphor for consumption is ‘putting food on the table’.
Meeting the economic challenge: ways to put ‘food on the table’
There are a surprisingly large number of ways that economic entities – households, businesses, governments, whole nations – can ‘put food on the table’; meaning to provide for themselves.
The first way is subsistence. In a pure subsistence economy, there is no marketplace nor ‘legal tender’ money. Households hunt, fish, gather, garden, and/or corral animals; they may do this on a mix of private and common ‘land’ (considering the sea as a form of ‘common land’). A subsistence country, without imports and exports, is known as an autarky.
The second way is through transfers. I identify four basic types: gifts, theft, taxes, and inheritance. Gifts are not always altruistic; for example, slaves – human livestock – are provided for by gifts (as are other prisoners). Gifts and common theft are ‘current transfers’. Inheritances are ‘capital transfers’. Taxes are legally mandated transfers to sovereigns; they put ‘food’ on governments’ ‘tables’.
The third way is through ‘paid work’; receiving remuneration for work or the sale of goods or services produced. This kind of remuneration can be summarised as labour income; wages and salaries, including the implicit salaries paid to self-employed people. (Though most executive ‘salary packages’ are not labour-income in the usual sense; they represent portions of their employers’ profits.)
The fourth way is income derived from capital; contractual remuneration paid on account of the possession of many real and financial assets. Machinery and buildings – and canals and railways and airports – are real assets which may be leased or rented out. Bonds, bank deposits, and company shares are financial assets. Intellectual property is a bit of both. Privately-owned real estate is both. Categories of capital income include dividends (from profits), rents, royalties, and interest. Income accruing to assets is called ‘yield’. (Gold is also a financial asset, though is not income-bearing; as such, it has no associated yield. Money is a financial asset. Money – unless in an interest-bearing account – does not have yield; nor does crypto-currency, which can be thought of as ‘virtual gold’.)
The above four ways of putting ‘food-on-the-table’ are essentially current methods of provision for an economic entity such as a household. The exception mentioned so far is inheritance, which is a transfer of capital. If the economic entity is a nation state, the equivalent of income is export revenues.
There are also four capital methods to put ‘food on the table’.
The fifth way of putting food on the table is through the sale of assets. In principle, anything listed above as an asset can be sold; the potential cost is the loss of income deriving from such assets. A special example of an asset sale is the withdrawal of money from a bank deposit; that is, the drawdown of savings.
The sixth way is to borrow money and to use it to buy ‘food for the table’. That creates a debt; a liability which would normally be serviced from future current income such as wages. (Though a bridging loan would be serviced by a subsequent asset sale.) Compounding economic growth, in principle, facilitates wages rising more than enough to counter the compounding interest burden of debt; that allows the debt to be serviced and eventually repaid. Historically, much debt has been deflated by inflation (or, to a lesser extent, by bankruptcy); much historical debt has thereby been converted into transfers (the second way), enabling plenty of food to have been placed on the tables of many people born in the 1930s, 1940s and 1950s.
The seventh way is capital gain. If a recently acquired asset appreciates in market value, it can be sold, and the proceeds of that sale may be used to put food on the table. Alternatively, new loans can be taken out, allowing unsold assets to accrue capital gain (as collateral). The new loans put food on the table, in the full expectation that such new debts can be retired in the future through the sale of the collateral assets. (This can of course go awry if those capital gains prove to be ephemeral, meaning that the collateral becomes insufficient to repay the compounding debt.)
The eighth way is Ponzi finance. One version is to accrue unsecured debt (and to spend some or all of it on consumables such as food on the table), and to service that debt in the future by acquiring further unsecured debt. This becomes fraud – a form of theft – if the creditors are deceived with manipulative intent by the debtor entity. If the debtor entity has ready access to borrowed money, that access to future debt serves as an alternative to collateral. (Banks, necessarily, have privileged access to future debt; especially central banks such as the Reserve Bank. Nonbanks may have to secure future debt by offering to pay above-market interest rates.)
We note that, whenever a nonbank entity borrows money – eg from banks – then, from those lenders’ points of view, they have invested in the entity.
Thus, the more general way to think of Ponzi finance is through the concept of ‘investment’, in both the economic and speculative senses of that word. The economic meaning of investment is to purchase a new asset, to purchase on a primary market. The speculative meaning is to purchase an existing asset, to purchase on the secondary market; to purchase (say) a house or company shares or bonds on the resale market, either to gain a yield or in the hope of a capital gain. A new bank deposit is not in itself an economic investment – it’s saving, not investment – but it may facilitate a loan by the bank to another customer; such a loan would be an investment by the bank.
Many economic entities, probably most, finance current spending – put food on the table – through the use of more than one of these eight methods. For example, a superannuitant may receive a transfer payment, some wages, and some provision in the form of interest or rent or capital gain; or might have a reverse mortgage, whereby food on the table is funded by secured debt.
Ponzi Schematics
We note first that the word ‘scheme’ has pejorative undertones and overtones (like the words ‘regime’, ‘proxy’ and ‘propaganda’ for example); so, having a discussion about the possible benefits of Ponzi schemes runs counter to entrenched narratives, ie before any discussion has even started. (And of course the name Ponzi is also entrenched in our cultural ‘Book of Bad’.) Nevertheless, counternarrative discussions are what the world urgently needs; and on all manner of topics. Many things that are labelled as ‘bad’ are not entirely bad.
(A scheme is simply a proposal or a program. A regime is simply a government or an administration or a constitution. A proxy is an ally, a smaller participant in an alliance; the United States has numerous proxies. Propaganda is a narrative, drawing [as narratives typically do] more heavily on normative criteria – beliefs, and managed perceptions – than on verifiable evidence. To use the regime vis-a-vis government example: when we use this example of value-loaded language, regimes ‘scheme and propagandise’, whereas governments ‘administer and inform’.)
From here on, I may use the word ‘entity’ (‘Entity’ for a formal organisation) rather than ‘scheme’. A Ponzi entity would normally have the trappings of a business, though it could be that financial mechanism adapted by a country or a government.
Investors ‘invest’ in the Ponzi entity, essentially by lending it unspent money, and securing a contract to gain a yield; and having the invested money able to be withdrawn on relatively straightforward terms. (This contrasts with retirement-pension finance in which the yield or capital gain is compounded, and the ability to withdraw each ‘investment’ is strictly limited.)
The owners – or principals – of the Ponzi entity would themselves spend on themselves (rather than ‘invest’ in the economic sense) much of the money that’s paid to them; the rest of the money paid into the scheme would be held as a ‘liquid’ cash reserve. Thus, the Ponzi entity is essentially a consumer (like a household) rather than an intermediary (a bank or a vanilla finance company) or an ordinary business (which is a producer).
Investors in the Ponzi entity will be paid out – yield and repayments – from a cash reserve which is dependent on incoming funds from new investors (or additional ‘investments’ from existing ‘investors’). Thus, the Ponzi entity is commonly understood as a kind of financial perpetual-motion machine. It is like a time machine – not a time-travel machine – which works by continually borrowing energy from the future; and, as the future is infinite, there is no necessary endpoint when the machine stops working.
A Ponzi entity is able to continue to function so long as sufficient new investments are forthcoming. That ongoing functionality is facilitated by investors who infrequently withdraw their ‘savings’ and/or who are content to let their yields – their interest – compound; miserly investors, in other words, who deposit much and withdraw little.
The Ponzi entity fails when withdrawals exceed its ability to secure ongoing investments. Unusually large numbers of withdrawals can be called ‘capital flight’.
Harms and Benefits
In itself, a Ponzi Entity is an enterprise; a fraudulent enterprise if there is deceptive intent on the part of the principals. It transfers consumption from ‘investors’ to company ‘principals’. But these businesses can only thrive if there are investors who are simultaneously frugal and greedy; people who do not want to spend their money (or at least not for a while), but who also demand returns that are both high and liquid. (By liquid, we mean able to access their ‘money’ – interest or capital – on call and with minimal risk of capital erosion.) Such investors are frequently hoarders (maybe they are ‘insurance hoarders, saving for a rainy day’) – rather than people who save for particular short-term purposes – who expect to receive high amounts of interest in return for their hoarding; noting that hoarding is, in and of itself, a deadweight cost on the economy. (Hoarding – distinct from both economic investment and short-term saving – is a circulation blockage, much as fatbergs are blockages in the sewerage system.)
Under these conditions, the Ponzi entity is able to re-inject hoarded funds into the economy, negating the deadweight cost associated with miserly hoarding. Ponzi entities act to restore the circular flow of money in the economy; effectively removing or by-passing a circulation blockage (much as a stent might do with respect to a sclerotic patient with circulatory disease). Consumer spending – food on the table, to persevere with that metaphor – facilitated by Ponzi finance acts essentially as current transfers from miserly contributors to spendthrift principals. Ponzi principals compound debts which are neither serviced nor repaid; rather they are rolled over into either perpetuity or bankruptcy.
So, the harm is the spending of invested funds as if they were gifts; and the potential for the investors to lose their money. Ponzi finance is a victimless crime, so long as the investors (whose current needs are being satisfied by other means) continue to get what they want; which is an accumulating – that is, compounding – on-call savings balance. It’s victimless theft; that is, victimless until the scheme falls over and the investors lose their money.
It’s like much ‘benefit fraud’; a kind of fraud which helps to keep the economy ticking over and thereby generates about as much public revenue as it depletes. Indeed, maybe more revenue is generated than depleted. So the benefit of Ponzi spending is its inherent counter-recessionary nature; hence Ponzi schemes are most likely to thrive in circumstances of inequality, and may indeed stave off otherwise-immanent recessions.
When the Ponzi entity is a country; a nation-state
In this case, the investors are foreign entities: households, organisations, governments. The domestic economy is the Ponzi entity; resident households, organisations and governments are together the beneficiary principals. Though some beneficiaries may be more equal than others; New Zealand’s stunning growth of imports since 1985 has been distributed far from equitably.
In this nation-state case, it is extremely unlikely that the only way a country puts imports on its table is through the Ponzi scheme. Exports always continue to play some role in funding imports. Further, a Ponzi scheme is not the only way through which debt may be used for consumption and then subsequently not repaid. Inflation is another. (Those who have historically benefited from inflation are typically the parents of those who now rail against inflation. Indeed, there are stabilising benefits to inflation not unlike those circulatory benefits arising from Ponzi finance; that’s why inflation is regarded as compulsory, noting that New Zealand and many other countries have a policy requirement that annual inflation should be between one and three percent.)
Any country which has had continuous – or near-continuous – current account deficits for forty or more years can be said to be beneficiaries of a long-running Ponzi environment. New Zealand is very definitely one such country. Australia used to be such a beneficiary, too. The United Kingdom almost certainly is, though that country’s economy is obscured by the financial roles played by its many realm countries – including the likes of Jersey, Gibraltar, Bermuda, Virgin Islands, and Cayman Islands. Canada may be undergoing relatively recent ponzification.
A special case of a Ponzi country is the United States, to which the international community has granted specific stabilising privileges. The United States’ [Ponzi] economy is comparable to the giant black hole at the centre of the Milky Way. It separately involves both its longstanding current-account deficits (funded in perpetuity by foreign investors) and its longstanding federal fiscal-deficits (funded by both those self-same investors; and, critically, by the United States Federal Reserve Bank).
New Zealand
The last year in which New Zealand – very much one of the world’s consumer nations – did not enjoy a current account deficit was 1973. The circumstances from 1974 to 1984 were non-Ponzi; they reflected both an acute and a secular decline in New Zealand’s terms-of-trade through which New Zealand had no choice but to resort to overseas-sourced credit. There was no way during the decade from 1974 that any country facing such circumstances could export enough goods and services to pay for its imports.
Nevertheless, New Zealand’s policymakers did their very best to meet the challenge of ‘putting food on the New Zealand table’ through the diversification of income and the challenge of import-substitution. That is, until 1985, under the auspices of the ‘new-broom’ Lange-Douglas government.
Roger Douglas’s pre-election devaluation policy was most probably intended as a means to meet that challenge of more exports and fewer imports; this was a key feature of Douglas’s 1981 book There has got to be a better way. Douglas was not an innate Ponzi-schemer; he was largely played, a victim of the 1970s and 1980s global resurgence of financial liberalism. His tenure as Finance Minister thus came to be characterised as a period of over-valued rather than under-valued exchange rates, despite the principal talking-point of his book. Even more than a history of perpetual current account deficits – which is also a historical feature of developing economies – a multi-decade history of an appreciating exchange rate in a country with a floating currency is also a feature of international Ponzi finance.
In the first half of 1985, a very deliberate policy of financial deregulation was implemented; and so quickly that doubters had no time to mount a defence. The expectation at the time was that New Zealand’s traditional commodity-export-based economy was in terminal decline, and indeed suggested by the Terms of Trade chart. Little attention had been paid by the new elites to the substantial and mostly market-led restructuring of the tradable sector; restructuring that had already taken place, under duress, in the years from 1974 to 1984.
The initial flagship component of the new policy was the floating of the New Zealand dollar (NZD). The exchange value of the NZD would have to be defended by a monetary policy of unprecedented high interest rates. In other words, this was a Ponzi scheme; arguably a scheme with fraudulent intent. Those interest rates were nectar to foreign speculative investors; many of those investors actually being intermediaries such as pension funds and their likes, guardians of the captive funds of foreigners saving for their retirements. The overall intent – established through the revamped 1980s’ rhetoric of economic liberalism – was to treat the tradable sector (exports, and import substitution) with almost complete contempt.
And indeed there was a substantial disintegration of the tradable sector, which had been constructed for over a century, since the days of Sir Julius Vogel. Examples which some may remember were the near-collapse of sheep-farming, with some farmers diversifying into a short-lived goat bonanza. And there was the 1980s’ ocean-fishing expansion, including the rapid exploitation and depletion of the orange roughy fishery.
New Zealand’s increasingly competitive manufacturing sector went into steep decline before recovering at a permanently lower share of GDP. One example of this was the Whangarei Engineering Company which built excellent tugboats – and the Bounty replica – but which went under because New Zealand buyers were encouraged to favour imported tugboats subsidised by foreign governments (in this case, Australia). New Zealand became religiously opposed to any kinds of subsidy or assistance to the tradable sector; almost unique in the world.
(On this matter of nation-state Ponzi schemes with arguable fraudulent intent, the classic case is that of Iceland from 2006 to 2009. Other Nordic countries – Finland and Sweden – did something similar in the late 1980s and early 1990s; and, like Iceland in the 2000s, they got caught out. Also, and again like Iceland in the 2010s, they recovered relatively quickly; though they became Ponzi investors rather than Ponzi principals, contributing to the circulatory instability which has plagued the world since the 1980s. Sweden in particular continues to amass huge and ongoing current account surpluses, the exact opposite of New Zealand. Another country – like New Zealand – which continues to have Ponzi-structured finance as part of its ‘putting bread on the table’ mix is New Zealand’s south seas’ neighbour, the Kingdom of Tonga.)
In 1986, a year after the high-interest Ponzi scheme was established, something remarkable happened. The longstanding secular decline in New Zealand’s terms of trade reversed; a circumstance of fortune which eventually (ie in the 21st century) became equivalent to Norway’s 1970s’ discovery of huge oil and gas fields in the North Sea.
So New Zealand’s Ponzi economy, established in 1985, came to be blessed with an unanticipated windfall; a windfall large enough to facilitate the building of a new export-oriented tradable sector despite the high interest rates and overvalued exchange rate. (The overvalued exchange rate probably helped; many of the costs of this new sector were internationally priced, meaning that the high exchange rate became like a subsidy; especially as the expanding pool of rich foreign buyers were themselves relatively insensitive to the prices they were paying.)
Thanks to that change of fortune – which first began in 1986, and re-began around 2001 with the growth of the China market – New Zealand was able to fund an astonishing four-decade import spree, funded this century from a mix of bonanza-like export prices and Ponzi-style investments. These ‘investments’ were in large part financial inflows, drawn-in – more than anything else – by New Zealand’s attractive-to-investors monetary policy settings from 1985 to 2023; and supplemented by booming real estate markets in the 2000s and 2010s. Despite slow income growth, New Zealand consumers have had plenty of food on their tables; though more tables than ever also went without, due to increased inequality. New Zealand now imports most of its staple granular foods; in the language of the classical economists, New Zealand – a protein-food-exporter – has become a corn-importing country.
Government Ponzi finance
New Zealand as a Ponzi entity may be called New Zealand Financial Inc. The government is not a Ponzi principal – the New Zealand government has low debt by international standards – but does whatever it can to attract ‘private investment’ to support the national Ponzi scheme. And it prioritises monetary policy (while delegating it), which means that there is an understanding that interest rates will – whenever necessary – be raised to continue to be a drawcard to attract funds from the world’s less spendthrift countries.
A country very different to New Zealand is Japan. The world’s fourth largest nation-state economy, it has a long history of high personal savings and of current account surpluses. Its people don’t like paying taxes. Japan went through a shocking decadus horribilis in the 1990s, following a brief few years in the late 1980s of a financial bonanza underpinned by massive though illusory capital gains and an overvalued exchange rate.
As a result, Japan pretty-much invented a new macroeconomics, and it works. It is a macroeconomics, pioneered without acknowledgement or recommendation by the United States as a result of its post-WW2 status as the world’s financial centre of gravity (though most Americans fail to see how global prosperity – including their own prosperity – hinges on United States debt); a macroeconomics predicated on high levels of government debt and perpetual public-sector financial deficits. (Such deficits need not all be spent on infrastructure or bureaucracy or military capacity; also, they can be recycled back to people – in a way that poor people get the same dollar or yen amounts as rich people – as a contribution to some form of universal income, resulting in more private prosperity and less inequality.)
The Japanese government operates a virtuous domestic Ponzi scheme; the Government is the principal, and the citizen taxpayers are the investors. In essence, the people lend their money to the government at zero or near-zero interest rates, as an alternative to paying more taxes to the government. Indeed the Japanese get to ‘eat their cake and have it’. The government spends the citizens’ surplus cash, which still remains there for the citizens to spend as well and at will, should they need to or wish to spend it. Japanese householders will never all want to spend all their money invested with their government all at once.
(Modern fractional banking, likewise, is based on more than one party being able to spend the same pool of funds; this is reality, not magic.)
Finally
The beneficial reality of Ponzi finance is that, so long as there are many people with money they either don’t wish to spend or (as in KiwiSaver) are not allowed to spend or have so much money that they simply cannot spend it all, then there can also should be Ponzi schemes to accommodate them. In the case of Japanese savers, they much prefer – than the alternative, which is to be taxed more – to invest their money in a safe Ponzi scheme; that scheme is their own government.
Japan runs on government deficits and current account surpluses. Japanese citizens invest in both foreign and domestic Ponzi entities without coming a cropper. Others eat their cake, while they continue to have it. The Japanese government can remain a secure Ponzi principal because it has the sovereign privilege of being able to raise taxes; a sovereign right that it is unlikely to have to effect anytime soon because it has had a well-functioning economy of circulation, low non-stimulatory interest rates, and optimal inflation.
Will the New Zealand Ponzi scheme – established 1985 – ever fold? Maybe not. New Zealand is small and the world is large. Indeed those who have invested in New Zealand, a Ponzi entity for four decades, have generally done well for themselves. So far, the only significant casualties have been lower-income New Zealanders who have been priced out of the labour market and the housing market; not the scheme’s foreign investors.
But a trend-change in the terms-of-trade – meaning persistent falling terms of trade in future decades – could certainly trigger a demise of the scheme; so could an inability to continue to attract sufficient investors for any other reason. The challenge then would be to look to the many new New Zealanders – many who are internationally well-connected – to reestablish a balanced trading economy, and for New Zealand citizens and denizens to accept significantly reduced levels of imported goods and services. And to embrace a model of public finance which works for rather than against the people.
About the writer:
Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.