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tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source.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

ANALYSIS: By Dr Merja Myllylahti

New Zealand’s largest newspaper, The NZ Herald, launched its digital subscriptions today for online content, making history at the same time.

Its paywall is the first for a general newspaper in New Zealand.

Back in 2011, The NZ Herald’s parent company APN (now NZME) launched a digital-first initiative which was deemed critical for its future digital revenue. As a part of that initiative, APN was considering digital subscriptions for The NZ Herald.

READ MORE: NZ Herald’s editorial – Premium, strategy an investment in our journalism

Eight years later, this future imagined by APN bosses has arrived and will affect other players in New Zealand media.

The National Business Review, a business newspaper, has charged its readers since 2009, and digital news outlet Newsroom already charges for its premium content.

The New Zealand portfolio of Stuff, which is now owned by Australian Nine, includes digital news site Stuff, print newspapers and the community site Neighbourly. Stuff has no paywall, but The NZ Herald’s move to paid online content raises the question of whether it will follow its competitor.

My bet is that a similar move is unlikely.

Stuff has built its revenue model on e-commerce activities and is now selling broadband access, electricity and health insurance among other things.

Benefits of online traffic
For years, NZME and Fairfax Fairfax NZ (now part of Nine) avoided charges for their digital news content because of their duopoly in the New Zealand print and online news markets. The two companies feared that if one of them would introduce paid content, the other one would reap the benefits and gain in traffic.

On the other hand, traffic is perhaps not the main concern of The NZ Herald as it is targeting to convert a proportion of its audience to paid readers. For the first year, its aim is modest. It is aiming to gain 10,000 digital subscriptions.

To put the current situation into context, in 2018 Stuff had a unique audience of 2.1 million and The NZ Herald 1.7 million. According to SimilarWeb data, in the first quarter of 2019, Stuff had 34 million monthly visits compared to The NZ Herald’s 27 million.

For several years, NZME and Stuff pursued a proposal to merge. But when ruling against the merger in 2017, the Commerce Commission observed:

Both NZME and Fairfax have currently decided against introducing some form of paywall primarily because of the threat of readers switching to their competing online news websites and the risk of putting advertising revenue at risk.

That risk still exists, and it will be interesting to see whether Stuff gains in audience, traffic and advertising now that The NZ Herald paywall is going up.

The Commerce Commission was also concerned that if the merger had gone through, the combined company would introduce a more expensive paywall. As the merger was denied, this worry does not apply. But we don’t know how restrictive or pricey a joint paywall would have been.

Bundled with syndicated content
The NZ Herald paid content model is a “freemium” model. It allows readers free access to some content, but the premium content such as business news will be behind a paywall. It is also a very bundled model as the paper promises paid readers syndicated material from The New York Times, The Financial Times, The Times and Harvard Business Review, to name a few.

At this point it is not clear how much and what content exactly this large syndicate offers for The NZ Herald readers, but clearly the deal does not include full access to these sites.

The paper’s premium content editor, Miriyana Alexander, said:

While our major focus is on the delivery of the very best New Zealand journalism, we know that the addition of these four publishers, alongside the likes of the Washington Post and The Daily Telegraph will make for a terrific, unrivalled package of journalism and content.

As indicated in the table below, the annual digital subscription to The NZ Herald will cost NZ$199, compared to The Age’s and The Sydney Morning Herald’s NZ$294. Compared to prices of The New York Times (US) and The Telegraph (UK) it is cheaper, but compared to Le Monde (France) it is substantially more expensive.

All about business
It remains to be seen how much of The NZ Herald’s content will be behind a paywall and how much will continue to be freely accessible. Interestingly, academic studies of paywalled content have found that paywalled newspapers offer news sourced from newswires and syndicates for free whereas the most valuable content such as hard news, financial news, politics and opinion pieces have been hidden behind a paywall.

Alexander says the paper invests especially in business coverage, and it aims to be “the go-to destination for specialist, insightful and essential business journalism”.

The National Business Review and Newsroom Pro are competing in the same market, and they already have paid content strategies in place. I do wonder if the New Zealand market is really big enough for three players focusing and charging for business content.

One major decision is where to draw the line between free versus paid content. In France, Le Monde paywalls roughly 37 percent of its content, so readers have free access to the majority of its articles. According to Digiday, the paper found that putting more than 40 percent of its content behind a paywall had a negative impact on the potential of gaining new subscribers.

When the paper reduced the number of its paid articles last November, its traffic rose from 84 million to 97 million in a month, increasing its pool of potential subscribers.

Getting the balance rights seems to matter.

Dr Merja Myllylahti  is co-director of the Journalism Media and Democracy (JMAD) research centre at Auckland University of Technology. This article was first published by The Conversation and is republished here under a Creative Commons licence.

Article by AsiaPacificReport.nz