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tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source.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.

Cabinet Minister David Parker recently told The Spinoff he’s reading The Triumph of Injustice – how the wealthy avoid paying tax and how to fix it, by Berkeley economists Gabriel Zucman and Emmanuel Saez.

The book complains that leftwing politicians throughout the world have forsaken their historic duty to innovate on taxation and force wealthy vested interests to pay their fair share. The authors say governments of both left and right have capitulated unnecessarily to the interests of the wealthy in setting policies on tax and spending.

Parker shares this ethos and it’s undoubtedly a big part of his decision to revolt against his leader.

First, Parker ignored constitutional conventions and spoke out against the Prime Minister’s decision last month to rule out implementing any capital gains or wealth taxes. And last week he resigned as Minister of Revenue, saying it was “untenable” for him to continue in the role given Hipkins’ stance on tax.

Clearly, Parker is highly aggrieved at Hipkins’ decision to rule out a substantially more progressive taxation regime, especially when there is such strong public openness to it.

In May, a Newshub survey showed 53 per cent of voters wanted a wealth tax implemented. And last week, a 1News poll showed 52 per cent supported a capital gains tax on rental property.

Parker has become the progressive voice of Labour
Parker has thrown a real spanner in the works for Chris Hipkins at a crucial time in Labour’s re-election campaign. Such dissent from a Cabinet Minister is highly unusual.

It’s also refreshing that it’s over a matter of principle and policy, rather than personality, performance, or ambition.

There will be some Labour MPs and supporters annoyed with Parker for adding to Labour’s woes, especially when the government is already looking chaotic. He’s essentially declared a “vote of no confidence” in his own party’s tax policy.

This is not the staunch loyalty and unity that Labour has come to expect over the last decade, whereby policy differences are suppressed or kept in-house.

But even though Parker was being criticised last week by commentators for throwing a “tantrum” in resigning his Revenue portfolio, this charge won’t really stick, as he just doesn’t have that reputation.

His protest is one of principle, not wounded pride or vanity, and it’s one that will be shared within the wider party.

In taking such a strong stance on progressive taxation, and so openly opposing Hipkins as being too cautious and conservative, Parker has become something of a beacon for those in Labour and the wider political left who are discontented over this government’s failure to deliver on traditional Labour concerns.

Is there a future for Parker in Labour?
Parker’s outspokenness may be a sign that he’s had enough, and is looking to leave politics before long. Being on the party list means he can opt out of Parliament at any time.

After the election, he may decide it’s time to retire, especially if Labour loses power. In fact, Parker has long been rumoured to be considering his retirement from politics, so it might just be that the time has finally come.

A private decision to leave might explain why Parker has decided to put up and not just shut up, and publicly distance himself from Labour’s decisions on tax for the sake of his reputation.

It’s also possible that Parker has chosen to try to pressure Labour towards a more progressive position on taxation, and this is the start of a bigger campaign. If so, he would be playing the long game.

Parker is now established as the most progressive voice in Labour, which could see him move up the caucus ladder when Hipkins eventually moves on — especially if Labour is defeated at the election in October.

And Hipkins might have inadvertently invited opponents to want to replace him with a more progressive politician when he made his “captain’s call” to rule out any sort of real tax reform for as long as he holds the role.

Given that they had an absolute majority in the last three years they can’t blame anyone else. And should they lose the election, the analysis from within Labour will certainly be that they were too centrist and didn’t do enough.

Parker would be a strong contender for the leadership sometime in the next term of Parliament. That is if he wants it and hasn’t simply had enough. There are signs that he would be keen — he ran for the top job in 2014, with Nanaia Mahuta as a running mate, but lost out to David Cunliffe.

Last week he reiterated that he was up for a fight, explaining his decision to stand down as Minister for Revenue, saying, “I’m an agent for change — for progressive change.

“I’ve been that way all of my political life and I’ve still got lots of energy as shown by the scraps that I’ve got into in the last couple of weeks on transport.”

Of course, when the time comes to replace Hipkins, the party will face the temptation to look for a younger and “fresher” leader. Until very recently, the likes of Kiri Allan and Michael Wood were seen as the future, but those options have disappeared.

And the party might do well looking to someone with more proven experience.

Parker could fit that bill — he’s been in Parliament for 21 years and served in the Helen Clark administration as Attorney-General and Minister of Transport. He is seen as an incredibly solid, reliable politician, with a very deep-thinking policy mind.

By contrast, the rest of the cabinet often seems anti-intellectual and bereft of any ideas or deep thinking, which means that they are too often captured by whatever new agendas the government departments have pushed on them.

Arguably that’s why the blunt approaches of centralisation and co-governance have so easily become the dominant parts of Labour’s two terms in power.

Labour needs Parker’s progressive intellectual politics
Regardless of whether Parker ever gets near the leadership again, it’s clear he has much to offer in pushing the party in a more progressive direction. Certainly, Labour could benefit from a proper policy reset and revival — which Hipkins hasn’t been able to achieve.

The new leader managed to throw lots of old policy on the bonfire, and he successfully re-branded Labour as being more about sausages and “bread and butter” issues, but Hipkins hasn’t yet been able to reinject any substantial positive new policies or ethos.

Parker’s dissent this week indicates that frustration from progressives in Labour is growing, and there are some very significant policy differences going on in the ruling party of government.

For the health of the party, and for the good of the wider political left, hopefully Parker will continue to be a maverick, positioning himself as an advocate of boldness and progressive change.

Parker recently selected Thomas Piketty’s Capital in the Twenty-First Century as the book “Everyone should read”. He explained that “As a politician who believes in social mobility and egalitarian outcomes, this book inspired me to seek the revenue portfolio”.

That Parker has now had to give away that portfolio says something unfortunate about the party and government he is part of. And if the last week also signals that Parker is on his way out of politics, that too would be a shame.

After all, in a time when parliamentary politics is about scandal, and the government has lost so many ministers over issues of personal behaviour, it would be sad to lose a minister who is passionate about delivering policies to fix the problems of wealthy vested interests and inequality.

Dr Bryce Edwards is a political scientist and an independent analyst with The Democracy Project. He writes a regular column titled Political Roundup in Evening Report.

Article by AsiaPacificReport.nz

Tuesday, February 7, at 2pm. That’s when New Zealand’s new Prime Minister Chris Hipkins’ parliamentary year begins and he faces National leader Christopher Luxon in the debating chamber for the first question time of 2023.

He needs to “Win the House”, as the saying goes. That means getting the better of the other side, and Hipkins has to show his caucus that he is up to it.

Hipkins is a vastly experienced parliamentarian, but there is nothing like being in the hot seat directly facing the leader of the opposition.

He can be expected to take it to Luxon and ACT leader David Seymour more aggressively than Jacinda Ardern did, he is more of a “take no prisoners” politician than she was and he needs to get some hits in early on.

Hipkins has had a great start with two opinion polls showing Labour has regained the ground it lost to National.

The 1News Kantar poll showed Labour up five points to 38 percent and National down one point to 37 percent.

Newshub’s Reid Research poll had Labour up 5.7 points to 38 percent and National down 4.1 points to 36.6 percent.

Hipkins slightly ahead
In the preferred prime minister stakes, Hipkins was slightly ahead of Luxon in both polls.

Stuff‘s political editor Luke Malpass said the polls showed what no Labour figures dared to consider a fortnight ago — that the party might have better prospects under a leader other than Jacinda Ardern.

“Hipkins, it now appears, could be that person,” he said.

“In other words, by the time Ardern left she might have been a drag on the party vote.”

Luxon dismissed the poll results, saying nothing had changed.

“It’s the same government, and a new leader who can’t deliver,” he said. “It’s going to be an incredibly tight race.”

The poll details, and what the results would mean in terms of seats if an election was held now, are on RNZ’s website.

Labour’s new champion
After settling in to his debating chamber role as Labour’s new champion, Hipkins has to get his next big agenda item off the blocks — ditching policies and programmes that are in the way of his pledge to totally focus on “bread and butter” issues that affect people, which means the cost of living.

This process was started by Ardern at the end of last year and Hipkins needs to get it done and dusted because there’s sure to be the usual cries of “U-turn, U-turn”.

Although Ardern and Hipkins have explained it as necessary to the new focus on dealing with inflation and the cost of living crisis, there Is also an obvious political need in election year.

Labour wants to get rid of liabilities, policies and programmes that are causing trouble and are easy targets for the opposition.

Hipkins needs what MPs call clear air to explain and implement policies Labour hopes will reset the party’s direction, entrench the lead over National and ACT, and deliver a platform for the election campaign.

The new prime minister may be in his honeymoon period but the media knows he has to deliver.

“He will have to show there is more on the tin than just a new sticker, and in pretty short order,” said Malpass.

“It won’t be enough to just chuck the odd media merger and dank old bits of legislation over the side: It will have to be replaced by some actions on the ‘bread and butter’ issues Chris Hipkins says he is concerned about.”

Plagued by troubles
The New Zealand Herald’s political editor Claire Trevett said Hipkins’ job was to convince voters that Labour was focused “on the various troubles plaguing them now — from potholes to hip ops to the price of bread”.

“The talk is one thing, the delivery is another. Hipkins has no real option but to deliver.”

There’s been speculation about which policies and programmes will get the chop or be put on the slow track, and Stuff published a list with the top three being the RNZ/TVNZ merger, the Income Insurance Scheme (which National calls a jobs tax) and Auckland Light Rail.

It said other lesser known projects could join the list.

Hipkins must also deal with Three Waters, which has given the government more problems than anything else.

That’s more difficult because the legislation has been passed, but Hipkins has acknowledged he has to do something about it.

“We are going to look closely at the Three Waters programme,” he told Trevett in an interview. “There’s no question there has to be change. I don’t think we can just sit back and say ‘this is not our problem, this is a council problem’.

“I don’t think that would be responsible. But we also need to bring people along with us and what we are doing.”

Policy clear-out
When it comes to the policy clear-out, Hipkins has much more freedom than Ardern would have had.

She would have faced ferocious opposition attacks for dumping policies she had supported, her words would have been thrown back at her.

But Hipkins is a new prime minister, doing things his way, just as Ardern told him when she said “you must do you”. She was giving him free rein to do it his way.

Did she know Labour was heading in the wrong direction under her leadership, and that it wouldn’t win the next election unless there was drastic change?

One commentator who thinks so is Matthew Hooton.

Writing in the Herald, Hooton said Ardern so badly wanted her government to win a third term that she was prepared to step down.

“Labour’s masterful transition was carefully planned before Christmas by Ardern and her closest allies, Grant Robertson and Chris Hipkins, and flawlessly executed,” he said.

Capturing the initiative
“Political strategists spend every December working out how to capture the initiative in January, especially in election year. None has ever succeeded like Labour over the last week.”

Luxon hasn’t had a good run-up to the new parliamentary year.

Inevitably, he’s been eclipsed by Hipkins simply because he is the new prime minister but when Luxon has been able to get into the media he might have wished he hadn’t.

“National strategists seem dumbstruck,” Hooton said in his article. “Christopher Luxon was more incoherent than usual trying to explain where he stands on co-governance, the Māori seats, and whether women politicians receive worse abuse than males, pleasing neither the liberal nor conservative wings of his party.”

Stuff’s Andrea Vance said Luxon had actually helped ease Hipkins into the job “by being more mediocre than usual”.

“Somehow Luxon — whose one job last week was to stay on message — managed to drive down a co-governance cul-de-sac at`Rātana, and then spend the rest of the week doing bunny-hop u-turns to get out of it,” she said.

“And how did he manage to piss off women, again? The correct answer was ‘yes’, Christopher. Female politicians patently face more abuse than men.”

Abuse of women
She was referring to Luxon responding to a question about whether women politicians suffered more abuse than men by saying he wasn’t sure.

When Hipkins takes his seat in Parliament on Tuesday he’ll have his revamped front bench alongside him.

The cabinet reshuffle, as RNZ reported, means some of the government’s most contentious portfolios will have a fresh face.

One of the most interesting facets was Hipkins’ decision to appoint Michael Wood as Minister for Auckland.

Hipkins explained the need to “get Auckland pumping” after a difficult couple of years, but there’s a political imperative behind it as well which the Herald’s Trevett saw.

“It is aimed as a pre-emptive counter to the inevitable attacks from Auckland-based opposition leaders such as Christopher Luxon and David Seymour that the Wellington-based Hipkins is a beltway creation and out of touch with Auckland’s concerns,” she said.

“It sends a signal that Hipkins has his eye on Auckland and knows its importance.”

Peter Wilson is a life member of Parliament’s press gallery, 22 years as NZPA’s political editor and seven as parliamentary bureau chief for NZ Newswire. This article is republished under a community partnership agreement with RNZ.

Article by AsiaPacificReport.nz