TVNZ’s special programme on Tuesday (News Special: You, Me and the Economy; 25 November 2025) included (about two-thirds of the way into the programme) among a number of helpful and unhelpful suggestions, a call for New Zealanders to get onto the compound interest bandwagon, the magic formula of getting rich in the never-never through thrift. Jam tomorrow, never today; which seems to be our main narrative towards fixing the West’s economic woes.

The spokesperson for compound interest on the program sort-of acknowledged that ordinary compound interest (ie “conservative” compound interest) was hardly good enough; she pushed for an amplified “high growth” version of compound interest.

She was correct, if understated, on her point about conservative returns.

Ordinary Compound Interest

If we go back 100 years, to 1925, the equivalent of today’s minimum wage was $120 per year. If a person saved $120 then, and allowed it to compound (say in the form of a one-year bank term deposit) through to 2025, an average after-tax interest rate of 4.23 percent would have been required to make that ‘investment’ worth $7,540 today. $7,540 represents compounded CPI inflation over those 100 years. Thus, in principle, $120 (actually £60) would have had the same purchasing power as $7,540 today. In reality, the average term-deposit interest rate over the last century was well under 4.23 percent before tax, let alone after tax.

(We note that tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source. For most of the last 100 years, tax on interest was more easily evaded, and it was paid separately, meaning that the compounding appeared to relate to before-tax interest income.)

In 1925, $120 per year supported, in many cases, low-income families. Imagine any family trying to live on an annual income of $7,540 today! The better way of evaluating past compound interest is to compare the compounded present value with today’s annual minimum wage, which is $48,800. For $120 in 1925 to compound to $48,800 in 2025, an average after-tax interest rate of 6.2% would have been required. That’s vastly in excess of what term deposit interest rates actually were, on average.

We should note that an average interest rate of seven percent would have compounded the $120 term-deposit to $104,000 today, and that an average interest rate of eight percent would have compounded the $120 term-deposit to $264,000 today. So, the magical exponential outcome of compound interest can occur, but only if the interest rate is sufficiently above inflation (ie above the compounded growth of prices); or, more pertinently, sufficiently above the compounded minimum-wage rate.

Other starting years

My calculations show that if the approximate minimum wage was invested in 1935, an after-tax average interest rate of 7.1% would have been required to achieve today’s minimum wage. (Wages were about twenty percent lower in 1935 than in 1925.)

In late 1970, I was earning seventy cents an hour milking cows every Sunday morning. That was about the minimum wage then. In 1980 I was in a well-paid IT job, earning $13,000 per year, which was more than double the before-tax minimum-wage-equivalent of the time. I have estimated annual minimum-wage equivalents for those years of $1,500 (for 1970) and $5,000 (for 1980).

For $1,500 in 1970 to compound to $48,800 in 2025, an average interest rate of 6.54% would have been required. For $5,000 in 1980 to compound to $48,800 in 2025, an average after-tax interest rate of 5.19% would have been required. (For the 1980 example, a before-tax annual average interest rate of about ten percent would have been required for such 1980 savers to have achieved three times today’s minimum wage.)

For a $30,000 term deposit in 2015 (again, set close to the minimum wage), an average after tax interest rate of five percent would have been required to compound that amount to today’s minimum wage.

Today’s one-year term deposit rate is 3.4% before tax, 2.4% after tax (applying a secondary tax rate of 30%). A $30,000 minimum-wage term deposit in 2015, compounded for ten years at today’s rate, would now be worth $38,000; well under today’s annual minimum wage (for a 40-hour per week job) which is nearly $49,000.

In the last 80 years, many people did make investment fortunes; but through property and other debt, not through saving.

Target Audience

We note that the target audience for this compound-interest narrative is young adults, because compound interest – like Mainland cheese – takes time. Most young adults in New Zealand today can only afford to save in this way if the money is taken from them ‘at source’ (eg through KiwiSaver), and then (if they are trying to live independent lives) they have to incur higher levels of debt than they otherwise would to be able to make those obligatory savings. Further, employer contributions to KiwiSaver are very much a part of the cost of labour, and are therefore factored in with employers offering lower wages than they otherwise would; after-tax employee remuneration is just a part – albeit a large part – of labour cost.

“High Growth” Compound Interest

The above simple mathematics show why the savings industry is trying to push products that simulate high-growth compound interest. In the years before 2008, and in the mid-2010s, these products rode the property bubble wave. Those ‘investments’ now appear rather naïve. But the industry of professional optimism always looks forward; it almost never looks back.

Today, amplified compound interest is (allegedly) being achieved through riding the world’s stock markets, with an emphasis on military stocks and ‘tech’ stocks (especially those of the ‘AI’ companies), and on cryptocurrencies. The ‘tech’ stocks (which the New Zealand Super Fund is highly exposed to) are one modern-day equivalent of mining-company shares; shares which historically have been amongst the most volatile. And crypto-currency mining is the virtual – and equally unsustainable – equivalent today of gold-mining as in the days of the Klondike, Ballarat, and Tuapeka gold-rushes. (Re gold rushes, 2025 is a global gold-rush year, though the years of the individual undercapitalised goldminer-made-good are in the past.)

Speculations on AI, Bitcoin, or African gold are no more routes to financial security or future abundance than is prosaic money-losing compound interest.

What are they thinking?

Compound interest without compounding economic growth.

We have to think about the compound interest narrative in two contexts, that of a static economy, and that of a perpetually growing economy.

The basic idea of a static economy is that there is no inflation nor economic growth. To keep it simple, imagine no population growth as well. And no taxes.

The mathematics of compound interest in this case are real. If you were able to save a sum of money and to wait for it to compound at two percent per year, you would more than double your money after fifty years, and increase it tenfold in less than 120 years. These gains to you and your entitled grandchildren would be fully funded by some other people and their impoverished grandchildren; every dollar of interest received is paid by someone else. It would be a zero-sum game for society; for every winner there would be a loser.

To propose compound interest like this sounds ludicrous, and it is. But, the whole object of monetary policy in New Zealand and like countries is to create a world in which the rate of interest is about two percent higher than the rate of inflation. That is precisely what I have described here. To achieve that goal, monetary policy ends up creating a structural recession, a perpetual state of zero economic growth; ‘green shoots’ only appear when the rate of interest is allowed to fall to at or below the rate of inflation.

In reality, compound interest has always been for the few, not the many. It’s an accounting trick that depends on the majority of the beneficiaries of compound interest never realising their apparent gains; never spending their paper bonanzas. Paper wealth can be converted to real wealth by just a few. Paper wealth – financial claims – can be inflated, infinitely, so long as it remains just that; paper wealth or its digital equivalent.

Compound interest with compounding economic growth.

The advocates of compound interest will respond by saying that compound interest depends additionally on economic growth, real economic growth.

In this story, there are two versions: either compound interest parasitically exploits economic growth, or it enables economic growth. Either way, the supposition is infinite exponential growth.

The simplest scenario here is of an economy with zero inflation, zero population growth, two-percent annual interest, and two-percent annual growth of real GDP. So, in this case, the two-percent compound interest simply represents the fruits of that economic growth; the only debtors would be firms, not households. In principle everyone could be doing it; the interest payable to every household would be paid by business growth.

There are two obvious problems. One is that real exponential growth cannot go on forever. If average real incomes today had been growing by two-percent per year since the early days of the Roman Empire, today we would on average have living standards 16 million trillion times greater than those of Jesus Christ and his Disciples.

The illusion (really delusion) of long-term sustained economic growth has been made possible by early-modern humans’ learning to extract energy in the form of fossil fuels, and to dump waste products into the environmental commons. Late-modern humans could have invested – financially and intellectually – in systems to maintain high living standards beyond the fossil fuel age; but haven’t. Our home planet, though forgiving in many respects, is finite.

The other obvious problem is that if too many households are saving rather than spending much of their incomes, then there would be insufficient demand for final goods during the long period of saving. This kind of saving behaviour breeches Say’s Law, which is the basis of the belief-system of classical-liberal supply-side economics – manifest today as neoliberalism. Say’s Law supposes that policymakers do not and should not concern themselves with matters of ‘upside demand’ – aka ‘stimulus’. Nor should they concern themselves with ‘downside demand’ – aka ‘counter-stimulus’ – yet that’s exactly what we got with the openly touted manufactured recession created by the Reserve Bank of New Zealand from 2021. (Refer Adrian Orr admits Reserve Bank is ‘deliberately engineering recession’, Stuff, 24 November 2022.)

The required economic growth would not continue, because there would be insufficient demand for the extra output; demand is created by the creation of and spending of claims, the prerogative of sovereign governments and of banks.

Saving must be balanced by investment; too much saving disincentivises investment spending, sometimes dramatically so. We can see that, the reason for today’s weak investment climate; so we depend on the Deus ex machina (or cargo cult) of exogenous foreign demand. Exports featured prominently as the principal narrative of You, Me and the Economy.

The other mantra word is ‘productivity’. Most cafes do not need more cost-saving devices to improve their productivity; rather, to improve their productivity, cafés need more customers.

See Our inability to understand the exponential function is our biggest weakness, YouTube, posted by Professor Albert Bartlett about a month ago. All exponential growth, in nature, ends; sometimes catastrophically.

Finally

Why don’t the people we believe to be experts tell us these things? Could it be that the experts we most see and hear are experts in the arts of storytelling and story-marketing; in this case, experts in the fantasy rather than in the reality of growth? (Refer Greta Thunberg’s radical climate change fairy tale is exactly the story we need, The Conversation, 28 September 2019.)

*******

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.

In particular, Buchanan and Manning examine whether we are witnessing a fundamental change to global economics and consider:

• How since the Covid-19 pandemic arrived even neo-liberal state economies have embraced an expansionist government strategy and significant degrees of stimulus.
• It would appear that the excesses of small government, market driven economies have, at this time, run their course.
• But what will replace the earlier systems?
• From a political economy point of view, what can we expect to take shape as the Pandemic grinds on, even while we all have had a glimpse of what a post-Pandemic new normal may mean?

You can comment on this debate by clicking on one of these social media channels and interacting in the social media’s comment area. Here are the links:

• Facebook.com/selwyn.manning
• Youtube
• Twitter.com/Selwyn_Manning

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Questions have been raised about why the head of Fiji’s Bureau of Statistics was fired by the Bainimarama government this week.

Kemueli Naiqama recently published this year’s household income and expenditure survey that showed three quarters of Fiji’s poorest people are indigenous Fijians, or i-Taukei.

It is the first time ethnicity has featured in data published in the annual survey.

RNZ’s correspondent in the capital Suva, Lice Movono, told RNZ FirstUp the bureau had been “enhancing their ability to report information” and trying to be in line with sustainable development goals reporting.

“And the latest report shows that the poorest people in this country are the i-Taukei people,” Movono said.

“But more importantly that our poverty population — or the population that is living well below the poverty line — is very high.

“It would be directly opposite to the policies of this government to give information segregated according to ethnicity — it would be extremely embarrassing for a government that has been talking about producing an all time record high boom – economic growth,” she said.

Sacking defended
The Statistics Department comes under the Ministry for Economy.

The Minister, Aiyaz Sayed-Khaiyum who is also Fiji’s Attorney-General, has defended his sacking of the country’s chief statistician.

Sayed-Khaiyum questioned the methodology used for the study and labelled it flawed.

“Poverty in Fiji is now measured by consumption, including the food grown in a family backyard, and not just income,” he said.

Sayed-Khaiyum told a media conference in Suva he had issues with the bureau’s analysis of ethnic and religious data in its 2019-2020 Household Income and Expenditure Survey (HIES).

“We appreciate any independent office carrying out a proper, professional independent analysis of any data and understand the importance of reliable, timely and accurate statistics,” Sayed-Khaiyum said.

“And many may not know this or many may not delve further into this — we in fact approved this new methodology of moving away from what we call using the traditional income measure for welfare analysis — to using consumption expenditure for poverty measurement.”

New measuring yardstick
Sayed-Khaiyum said the consumption-based methodology for measuring poverty would “accurately and better assist in policy-making”.

He said the new yardstick did not just look at how much money a household earned but also at how they had access to services.

But there were many who disagreed with the attorney-general.

The University of the South Pacific’s senior lecturer in economics, Dr Neelesh Gounder, said the poverty estimates produced at all levels were reliable.

He said those not happy with the ethnic-based policy needed to target the policy and not the data.

Gounder said the survey was just the “messenger and shooting the messenger would not help.”

“Regarding data on ethnicity, there are several policy areas where ethnic-based data is relevant and required,” Dr Gounder said.

Ethnic data important
“Ethnic data allows us to see beyond presumed beliefs and prejudices that underly ethnic groups and it seems the government wants to avoid race-based policies that may arise from ethnic data.

“Recognising diversity based on ethnicity does not necessarily mean such differences should also lead to policy based on ethnicity.”

However, the government needs to understand that it is not the census or HIES that is causing ethnic tension in Fiji, Dr Gounder said.

The leader of the opposition Social Democratic Liberal Party (SODELPA), Bill Gavoka, said reports Naiqama was escorted out of his office were “shameful”.

“It is truly troubling,” Gavoka said.

He said the Bureau of Statistics is independent of ministers and instead reported directly to Parliament, with staff who are civil servants, but without being under ministerial control.

“The statistics they generate are independent of government and to hear that the FBoS CEO Kemueli Naiqama was unceremoniously dismissed and escorted off-premises for the report of poverty in Fiji, says a lot about the type of democracy we have in Fiji,” Gavoka said.

Independence needed
He said SODELPA wants the Statistics Bureau to have independence from any undue outside influence, especially from a government that has been hyping about a “boom” that many knew was not true.

“The collection, compilation, analysis, abstraction, and publishing of statistical information relating to the economic and general activities must be carried out without fear and SODELPA tells the Attorney-General and FijiFirst, ‘hands off’,” Gavoka said.

By exceeding the scope of data collection and ignoring fact-based methodology, the government said Naiqama had breached the terms of his contract with the ministry.

Under his employment contract, Naiqama will be paid all salary and accrued entitlements for the period up to September 15, 2021.

This article is republished under a community partnership agreement with RNZ.

Article by AsiaPacificReport.nz

Among the many hard truths exposed by covid-19 is the huge disparity between the world’s rich and poor. As economies went into freefall, the world’s billionaires increased their already huge fortunes by 27.5 percent.

And as many ordinary people lost their jobs and fell into poverty, The Guardian reported “the 1 percent are coping” by taking private jets to their luxury retreats.

Such perverse affluence further fuelled criticism of the so-called 1 percent, which has long been the standard rhetoric of the political Left.

In 2011, Occupy Wall Street protesters called out growing economic inequality by proclaiming: “We are the 99 percent!”. And an Oxfam report in September last year lamented how the richest 1 percent of the world’s population are responsible for more than twice as much carbon pollution as the poorest half of humanity.

But you might be surprised to find this 1 percent doesn’t just comprise the super-rich. It may include you, or people you know. And this fact has big implications for social justice and planetary survival.

Look in the mirror
When you hear references to the 1 percent, you might think of billionaires such as Amazon’s Jeff Bezos or Tesla founder Elon Musk. However, as of October last year there were 2189 billionaires worldwide — a minuscule proportion of the 7.8 billion people on Earth.

So obviously, you don’t have to be a billionaire to join this global elite.

So how rich do you have to be? Well, Credit Suisse’s Global Wealth Report in October last year showed an individual net worth of US$1 million (A$1,295,825) – combined income, investments and personal assets — will make you among the world’s 1 percent richest people.

The latest official data shows Australia’s richest 20 percent of households have an average net worth of A$3.2 million. The average Australian household has a net worth of A$1,022,200, putting them just outside the world’s richest 1 percent.

If you’ve just done the sums and fall outside the 1 percent, don’t feel too sorry for yourself. A net wealth of US$109,430 (A$147,038) puts you among the world’s richest 10 percent. Most Australians fit into this category; half of us have a net worth of A$558,900 or more.

What does all this mean for the planet?
It’s true the per capita emissions of the super-rich are likely to be far greater than others in the top 1 percent. But this doesn’t negate the uncomfortable fact Australians are among a fraction of the global population monopolising global wealth. This group causes the vast bulk of the world’s climate damage.

A 2020 Oxfam report shows the world’s richest 10 percent produce a staggering 52 percent of total carbon emissions. Consistent with this, a 2020 University of Leeds study found richer households around the world tend to spend their extra money on energy-intensive products, such as package holidays and car fuel. The UN’s 2020 Emission Gap Report further confirmed this, finding the top 10 percent use around 75 percent of all aviation energy and 45 percent of all land transport energy.

It’s clear that wealth, and its consequent energy privilege, is neither socially just nor ecologically sustainable.

A potential solution
Much attention and headlines are devoted to the unethical wealth of billionaires. And while the criticism is justified, it distracts from a broader wealth problem — including our own.

We should note here, one can have an income that’s large compared to the global average, and still experience significant economic hardship. For instance in Australia, the housing costs of more than one million households exceed 30 percent of total income – the commonly used benchmark for housing affordability.

Here lies a central challenge. Even if we wanted to reduce our wealth, the enormous cost of keeping a roof over our head prevents us from doing so. Servicing a mortgage or paying rent is one of our biggest financial obligations, and a key driver in the pursuit of wealth.

But as we’ve shown above, as personal wealth grows, so too does environmental devastation. The rule even applies to the lowest paid, who are working just to pay the rent. The industries they rely on, such as retail, tourism and hospitality, are themselves associated with environmental damage.

Existing economic and social structures mean stepping off this wealth-creating treadmill is almost impossible. However as we’ve written before, people can be liberated from their reliance on economic growth when land – the very foundation of our security – is not commodified.

For social justice and ecological survival, we must urgently experiment with new land and housing strategies, to make possible a lifestyle of reduced wealth and consumption and increased self-sufficiency.

This might include urban commons, such as the R-Urban project in Paris, where several hundred people co-manage land that includes a small farm for collective use, a recycling plant and cooperative eco-housing.

Under a new land strategy, other ways of conserving resources could be deployed. One such example, developed by Australian academic Ted Trainer, involves cutting our earnings sharply – with paid work for only two days in a week. For the rest of the working week, we would tend to community food gardens, network and share many things we currently consume individually.

Such a way of living could help us re-evaluate the amount of wealth we need to live well.

The social and ecological challenges the world faces cannot be exaggerated. New thinking and creativity is needed. And the first step in this journey is taking an honest look at whether our own wealth and consumption habits are contributing to the problem.

Dr Alex Baumann is a casual academic, School of Social Sciences & Psychology, Western Sydney University and Samuel Alexander, Research fellow, Melbourne Sustainable Society Institute, University of Melbourne. This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Article by AsiaPacificReport.nz