Despite the mega-commentary about the Israel-Iran war, and especially the United States’ participation in that war, almost nothing is being debated about how the war is being funded.

I’ll make some comments about Iran later. But we need to focus on the United States, which is by far the most profligate party to this war. And Israel is being funded, like a charismatic and entitled teenage brat, by its (American) sugar daddy.

Most of us should have noticed that, with the exception of new tariffs which are not a significant source of United States government revenue, there has been no move to raise taxes. (The President has clearly invoked the use of tariffs as means of leverage through extortion; though he doesn’t properly appreciate that these taxes are paid by American residents.) Nor has any explicit ‘war loan’ or ‘war bond’ been floated in Wall Street.

The United States is ‘printing money’ to fund the war. This expression is both pejorative and a misnomer. Because printing money is an unmentionable, it’s hardly ever mentioned! Though it should be, because it’s an important financial mechanism, and it is not as sinful as it’s made to sound.

‘Printing money’ is not a literal expression; actually printed (or photocopied) money, counterfeit money, is illegal. Printing money, a figurative moniker, is in fact the day-to-day business of banking, with billions of dollars printed every day (and a near-similar number of dollars unprinted). The technology of printing money is that of double-entry-bookkeeping. Money is a social technology, as is double-entry bookkeeping.

What matters most to us is the role of the central bank – the Reserve Bank – in creating new money. And in particular the relationship between the Reserve Bank and its privileged customers, most of which are governments’ Treasuries and commercial banks. Even more particularly, we are interested in the most highly privileged relationship of all, that between the United States Federal Treasury and the United States Federal Reserve Bank. This exceptional relationship arises because the United States Dollar is the world’s reserve currency.

The War

Here are two quotes from Al Jazeera’s This is America: War on Iran: Cost of weapons and shift in the nature of warfare, 1 April 2026

Richard Gaisford: “It’s a significant contribution being made to the US economy by the defence industries. The last figures we have were for 2024, and that showed that it generated [?] something near one trillion dollars …”.

This comment reflects a wide belief that money is made by economic activity, and that the United States makes money by making, among other things, military hardware and software. The reality, of course, is that the money is made first, and is then used to purchase such hardware and software.

Interviewer: ‘Who has got the means to keep fighting at those levels the longest?’ Kenneth Katzman (a former senior analyst on Iran at the US Congressional Research Service): “The US Dollar is the main reserve currency of the globe, which means that the United States basically has the capability to manufacture money. Your viewers may not understand the mechanics of it, but basically the United States can print money.” (Actually, not only the United States.)

He goes on to address the military asymmetry between Iran and the United States: “The United States is a 28-trillion-dollar economy; Iran is a 400-billion-dollar economy”. Here he is talking about each country’s capacity to produce goods and services; not its capacity to manufacture money. Any amount of money can be made by any country’s banking-government nexus, and at trivial cost.

The interviewer (New Zealand’s Anna Burns Francis), and the other panellist did not respond to that seemingly provocative comment about printing money; there was no further discussion about how the war is being financed, only about how much it is costing. Discussion about the mechanics (and constraints) of printing money would go against the grain that most of us are fed. The public is not supposed to know – and generally does not know – that money is itself costless and can be manufactured, at will, in smaller or larger quantities.

Kenneth Katzman’s comments are not controversial; they are a statement of fact that no economist would disagree with. All countries’ banking systems (of which the central government is a component) have the capacity to print money; indeed, the New Zealand system (and other countries’ systems) necessarily did so in 2020.

The United States has fewer constraints on printing money than do other countries, but not zero constraints.

We note that money, like all financial and financialised assets, is not wealth; it is claims on wealth. So, the affordability of money – in practice – is measured by the ability of the economy to meet those claims, in the event that those claims are presented. (Indeed, the world can afford an octillion dollars’ worth of financial claims if it can be 100% certain that those claims will not be exercised; will not be spent on goods or services. The current world is awash with massive private holdings of financialised assets which, for the most part will not be spent on anything other than other financial assets. In technical language, such money has a very low ‘velocity’.)

We note also that newly printed United States’ dollars permeate into New Zealand through exports, including New Zealand made supplies to America’s war industry; to the United States’ military/industrial complex, which includes the space industry.

How does a country fund a war by printing money?

There are two key issues: rationing, and responsiveness.

The liberal critique against governments’ printing money is a general claim that governments are untrustworthy and spendthrift. In the eighteenth century when the liberal critique emerged, one principal concern was government adventurism in the form of warfare. This classical liberal critique presents one consequence of such government largesse as inflation (extra spending coming up against finite resources), and also presents any instance of general price increases as a consequence of government largesse. When governments consume relatively more resources, then – through the catalyst of inflation – private households and businesses consume relatively less.

The classical liberal critique emphasises this rationing issue, known as crowding out; in doing so, that critique presumes that private spending on goods and services is, per se, more efficient than public sector spending and redistributive transfers. There are two parts to this rationing argument: first, private parties are deemed to better assess (compared to bureaucrats and politicians) which items of spending translate to greater utility (ie happiness); second that relatively more private spending can be classified as ‘investing’, meaning spending for future rather than for present happiness. (Neither of these two propositions is generally true.)

The second issue, less emphasised by classical liberals, is responsiveness or ‘supply elasticity’. Classical liberals tend to assume that spending enabled by printed money does not elicit new production; ie does not bring-about a supply response. While this is true by definition for a hyper-taut economy, for the most part, economies are not hyper-taut and are indeed responsive to additional spending.

In the present case of the United States, the Israel-Iran War – on the pro-Israel side – is being funded substantially by new money printed for the United States government by the United States federal banking system; in the public accounts, this shows up directly as a huge increase in the United States’ fiscal deficit.

While prices are rising faster in the United States than before, this increase in general prices would appear to be substantially due to the supply-side cost-impact of the war itself, and not by increased aggregate demand inside the United States and the countries the United States imports goods and services from.

The United States domestic economy is not as supply-elastic as it might have been, given what ICE is doing to that country’s labour force. Nevertheless, the United States’ economy has been sufficiently depressed that it is now able to increase output without much difficulty. Hence, extra United States’s government spending has not in itself caused consumer prices in the United States to rise. The present chokehold on imports – a result of the war – is however causing CPI-inflation in the United States and the rest of the world. Prior domestic underemployment is one reason why money-printing may not be inflationary.

The second component of a country’s economic responsiveness to wads of newly printed money is that much production can be outsourced to the rest of the world. Thus, United States’ imports increase, the United States’ current account deficit increases, and the rest of the underemployed world gets to benefit from this as an economic stimulus. So, if the New Zealand banking-government nexus refuses to print money as a form of stimulus, the present Trump-printed money does create an alternative stimulus in New Zealand.

Certainly, New Zealand has very high visible and hidden unemployment, so (at present) is easily able to respond to the Trump stimulus. On that basis, New Zealand’s economic growth this year may not be as slow as is widely anticipated; though domestic confidence – in itself, a form of stimulus – may be countering the stimulus coming from the United States. In New Zealand too, any rise in CPI-inflation will be almost entirely due to the global supply chokeholds, and not to the American president’s money printing largesse.

Essentially, the United States is funding its war through its twin deficits: the United States fiscal deficit, and the United States current account deficit. The war is being funded through increased utilisation of underemployed resources throughout the world. In New Zealand’s case, we can see this easily and directly, by observing New Zealand’s increased exports to the United States.

How easily can other countries print money?

Technically, it’s as easy to print money in New Zealand as it is for the United States. However, the New Zealand dollar is not a global reserve currency, so a flood of new New Zealand dollars into the global economy is likely to generate financial risk; or at least perceptions of financial risk. ‘Investors’ – that is, financial traders – out there most likely would be more cautious about holding large quantities of New Zealand dollars (or $NZ assets) than they would be about holding large quantities of United States dollars. That caution generates an exchange rate risk; a risk that would be communicated to financial-asset-holders by the New York based rating agencies such as Standard and Poors.

When the exchange-rate risk is not widely seen as a matter of concern, New Zealand benefits mainly through its routinely-high current account deficit; that is, just the same way as the United States is able to benefit from printing money and enjoying the economic bounty of the world.

If the exchange rate risk becomes a concern however, the world would discount New Zealand dollar assets, and New Zealand would experience high levels of domestic inflation; that is, higher inflation than most other countries. The resulting low New Zealand dollar would confer a ‘competitive advantage’ on New Zealand; the current account deficit would close, exports increase, and reduced imports would create an increased demand for New Zealand- made goods and services.

The issue then becomes how responsive (ie supply elastic) the New Zealand economy is. If the domestic economy is able to respond to these new circumstances (which is the more common experience of other countries), then New Zealand would recover and soon prosper. The alternative is that New Zealand would go into an inflationary tailspin; that is, if its productive system is so hamstrung that it cannot respond to the stimulus of a low dollar exchange rate. One bad sign is over-dependence (as distinct from over-reliance) on imports. A dependent economy cannot switch away from imports. A country which relies on imports by choice, because imports are easily funded by exports, can usually pivot – if required to do so – towards more ‘tradable production’.

So, New Zealand can print money too, though printing in the proportion that the United States does certainly would be unadvisable. However, if a country overprints money, the normal situation is that the extra money just sits there in the banking system. (The brief real estate boom of 2021/22 has been widely attributed to excessive printed money stimulating a process of real estate speculation; though the unique circumstances of that few months – including labour and capital pandemic lockdowns – have not been properly researched. The government could easily have borrowed and then parked that money, but chose not to.)

Generally, the rest of the world is accommodating when some countries print more money (though not when all countries print too much money). The world has been very responsive to the United States for the entirety of post-WW2 history; it was American spending of new money that drove the economic growth of the capitalist world for 80 years.

The present US money printing to fund a globally-significant regional-war can be expected, sooner or later, to encounter an inflationary wall of its own making. The consequences of this war are to make the world economy much less responsive (ie are breaking the world’s economy) just as the American military-industrial complex – indeed the world’s expanding military-industrial complexes – are placing so many extra demands on the world’s economic environments.

War funding under pressure

Countries’ invaded or otherwise attacked on the perception that they are ‘easy meat’ tend to be much more capable of defending themselves than is widely understood. Their monetary systems are not integrated into the orthodox channels of the wider capitalist system; but their domestic monies work to keep domestic economies fully employed while on a war-footing. Yes, Iran will be printing money, and Iranians will be facing substantial visible and suppressed inflation. For Iran, that monetary process is a necessary part of its own defence. Money printing facilitates both necessary rationing in favour of the public sector, and also necessarily pushes the production system to its limits.

War times, historically, have shown that our economic systems are generally much more responsive than we presume them to be. Surprisingly often, the bullies neither win nor even achieve a limited range of objectives. Syria may be coming right today, despite rather than because of the nation which set off that 2010s’ war; a war which cruelly sandwiched the Syrian people between foreign bullies and a consequently more oppressive domestic tyranny.

We note that, when the United Kingdom was under threat during the first years of World War Two, it was able to import much on credit – especially from the United States, which was then a neutral country. China has played a large role in facilitating the United States’ more recent wars, through its current account surpluses. This time China will be helping to fund Iran’s war; as well as accommodating the United States through its ongoing – almost infamous – trade relationship with that country.

Indeed, when the Israel-US-Iran War is eventually over, it will be China’s version of the Marshall Plan which will revive the degraded world economy; part of that revival will be to write-off war debts, just as the United States – through plenty of printed money – eventually accommodated Germany’s reparations bill after World War One, and the West’s war debts after World War Two.

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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.

The modern anti-money laundering system (which makes banks and other firms check identity documents and scan billions of financial transactions) doesn’t stop crime. Criminals keep up to 99.9% of the earnings from misery, and a scheme meant to ‘protect the financial system’ causes severe social and economic harm.

So, where did it all start to go wrong?

Good intentions and ‘voluntary coercion’

Today’s anti-money laundering movement began at a G7 summit in 1989. The seven big industrialized nations circumvented the usual treaty-based consensus to establish an ad-hoc body to use financial flows to help prevent drug trafficking. The Paris-based Financial Action Task Force (FATF) later targeted money laundering associated with other profit-motivated crime and terrorist financing. All worthy aims.

For many years, however, few nations signed up to the ‘compliance with rules based on standards’ model that FATF advocated. Rather than trying to develop an alternative model, perhaps better aligned with countries’ anti-crime efforts, FATF rated compliance with 40 ‘recommendations’ (then claimed to reflect the effectiveness of anti-money laundering regimes) and began a ‘name and shame’ campaign — publicly denouncing nations not ticking enough boxes.

FATF no longer needed to persuade countries that its prescription worked. Nor demonstrate how it helps reduce crime and the social and economic harms caused by serious profit-motivated crime like drug, human, wildlife and arms trafficking, fraud, corruption, and tax evasion. Assumptions that it ‘should’ do so, or assertions that it ‘would,’ was enough, apparently.

In any event, countries can’t afford to ignore FATF because banks use its ratings as a proxy for risk in their dealings with other countries. Sovereign nations are effectively forced to submit to evaluation and implement the laws that FATF demands, to maintain vital access to international financial markets.

Unsurprisingly, momentum to join the anti-money laundering ‘family’ rapidly escalated. Facing the risk of exclusion from financial markets, seemingly more countries than there are countries ‘voluntarily’ joined the anti-money laundering movement. With 205 participants, the anti-money laundering movement counts more jurisdictions than even the United Nation’s 193 nation-states. (Mainly because FATF includes semi-autonomous jurisdictions separately, like China and Hong Kong, the UK’s dependencies and overseas territories, and islands formerly known as the Dutch Antilles).

Despite the now global ubiquity of money laundering controls, FATF admits that it still “pressures” nations to meet its demands, if they want to “maintain their position in the global economy.”

But, whether it works, or not (I’ll return to that shortly), unilateral financial sanctions and the anti-money laundering system — both part of a policy arsenal available to few nations — cause significant harm, and disproportionately affect smaller and less powerful countries.

Measures meant to ‘protect’ the financial system also harm economies

Pakistan’s Prime Minister, a former international cricketer and cancer campaigner, Imran Khan, recently decried the “devastating” impact of illicit financial flows causing “poverty, death, and destruction in…the developing world.”

He rued billions of dollars leaving developing countries, siphoned into offshore accounts, tax havens and real estate in Western capitals, and denounced a lack of political will in those countries to help recover looted funds, “because they gain from it.”

As well as the economic damage Khan described — some might say due to Pakistan’s failure to meet FATF standards (and a recent empirical study suggests a correlation between terrorism financing and the incidence, scale and location of terrorist attacks) — the anti-money laundering system also inflicts harm.

Compounding Pakistan’s difficulties, an evaluation report (embargoed since August) was released a few days after Khan’s UN speech in September, excoriating the ‘effectiveness’ of Pakistan’s anti-money laundering regime. Reportedly after lobbying from powerful nations, FATF had earlier added Pakistan to its ‘grey list’ of countries with claimed ‘strategic deficiencies’ (in June 2018), so Khan presumably needed no reminder that the anti-money laundering system inflicts social and economic damage. (Wielding the stick of financial exclusion, there may be little perceived need for subtlety. In October, FATF gave Khan a reminder anyway, bluntly warning that it might blacklist Pakistan at its next plenary in February 2020).

In any event, a similar theme — of deliberate, devastating economic damage inflicted by powerful nations for political reasons — was expressed by many other leaders at the annual UN General Assembly in New York at the end of September.

Many Caribbean nations, for instance, voiced dismay about the use of the financial system to hinder the economic development of small countries that try to compete with powerful nations.

Dr Ralph Gonsalves, Prime Minister of Saint Vincent and the Grenadines, decried the “weaponizing of trade and the banking system” as a “thinly-veiled war [based on stereotypes and paternalism] against…developing States under the guise of…reducing illicit financial flows.”

Dr Timothy Harris, Prime Minister of Saint Kitts and Nevis, described “unfair” blacklisting and “de‑risking” (where global banks use blacklists and ratings as proxy risk assessments and cut ties with local banks) as an “existential threat” to small economies. Saint Lucia’s Prime Minister, Allen Chastanet, agreed, adding that small nations are grappling with restrictions imposed with no “credible evidence of wrongdoing” wreaking “irreversible damage.”

Mia Mottley QC and Dr Keith Rowley, the Prime Ministers of Barbados and Trinidad and Tobago spoke, respectively, about the “challenges” of blacklisting and “deep concern” over the loss of correspondent banks harming small nations, which, according to Prime Minister Gaston Browne of Antigua and Barbuda, continues the economic damage wrought by centuries of exploitation by slavery.

It is easy (and common) unreflectively to dismiss such protests as contrary to the expressed aim to protect the financial system. However, even trenchant supporters of the dominant anti-money laundering narrative might concede at least some merit in some complaints.

For example, professional advisers from the United States, United Kingdom, and other former colonial powers helped design financial systems now labeled ‘deficient,’ and their clients in those more prominent countries remain some of the most significant users of such services.

Moreover, countries like the US and UK offer many similar services to those for which smaller nations are disparaged (Delaware, anyone?) The United States also frankly admits that it’s a “major money laundering jurisdiction,” yet commands the default global currency and is big enough to avoid negative consequences of pejorative labeling. And more laundering likely takes place in a few big countries like the US and UK, untroubled by poor ratings and blacklists, than most other countries combined.

The reality, however, is that few other countries can avoid the impact of financial sanctions or poor anti-money laundering ratings.

Sudan’s newly installed Prime Minister, for instance, appointed in August after months of mass protests, sought the removal of sanctions punishing the Sudanese people for acts committed by the previous regime. Iraq’s President Salih called for action to combat corruption networks and regain stolen assets. Vanuatu’s Prime Minister, Charlot Salwai, denounced persistent colonial hegemony, and Cuba’s foreign minister condemned the “economic warfare” of “criminal” financial sanctions hindering his country’s progress.

Venezuela’s Vice-President, Delcy Rodríguez, a lawyer targeted with financial restrictions by multiple countries, described economic sanctions as the “preferred weapon of domination in the twenty-first century”, capable of wiping out the income of sovereign states “with the press of a single digital button”, and punishing innocent people and using their suffering “to bolster…hegemonic power.”

Disconcertingly from a Western viewpoint which considers democracies the strongest cheerleaders for democratic institutions on the global stage, it was Russia’s Foreign Affairs Minister, Sergey Lavrov, who championed equality in international relations. Concerned, apparently, with the fragmentation of the international community, Lavrov characterized the emergence of a ‘rules-based order’ as trying to replace established rules of international law with new ones based on self-serving schemes and political expediency favoring only some countries. He urged that global challenges should be addressed based on the inclusive nature of the UN Charter and the interests of all states.

It’s easy to dismiss grievances from ‘the usual suspects.’ Narratives about Russia’s ‘autocratic regime,’ Sudan’s ‘brutal dictatorship,’ Pakistan’s ‘support for terrorists,’ Cuba’s ‘refusal to move towards democratization,’ and Venezuela’s ‘illegitimate regime’ are well-rehearsed. Who has the time to check if reality is more nuanced than these familiar tropes from our own politicians and industry insiders? (Especially, if we’re honest, about countries we might perceive as ‘other’).

But, whether the ‘rules-based order’ is a force for good, as many Western nations contend, or risks undermining international law and equality between nations, as Russia claims, financial sanctions and the operation of the anti-money laundering system clearly cause harm. Deliberately.

Harms intended

Financial sanctions (mostly, US-imposed) and FATF blacklists, grey lists, and ratings all affect countries’ access to financial markets, with no apology for any damage caused. After all, severe restrictions are the point of such sanctions. As FATF explains, it “pressures” nations to meet its demands “in order to maintain their position in the global economy.”

It could be said that countries harmed by blacklists and poor anti-money laundering ratings are righteously punished for not adhering to norms of the rules-based order. After all, from a Western perspective, a rules-based order sounds comfortingly familiar and uncontroversial, like the rule of law.

But the ‘rules-based order’ increasingly prominent in recent years is ill-defined and plagued with differing assumptions. Simple questions reveal complex concerns. Who makes the ‘rules’? Can all countries participate equally in their development? Does the new ‘order’ disproportionately favor, or harm, some nations compared with others?

Disturbingly, in the anti-money laundering context the answers to such questions also convey overtones of rich vs. poor, big vs. small, ex-colonizer vs. former colonies, and ‘us’ vs. ‘them.’

A few years ago, for instance, Saint Lucia’s Prime Minister, Allen Chastanet, described the “painful example” of financial exclusion by powerful nations whose professional classes were “the very architects” of the economic development strategies for which Caribbean nations are being penalized. Moreover, the G20, which “designated itself” as the forum for collective international economic cooperation, excludes most countries. Ninety percent of nations are not members of that “unofficial and non-inclusive bloc,” so “were not involved in the solutions to the problems,” he added, “nor were we consulted on its appointment as the arbiters of our economic fate.”

Nonetheless, complaints by affected nations might still be dismissed as self-serving, if the anti-money laundering system works.

In other words, if enough discomfort forces countries to introduce or strengthen rules enabling a material impact on serious profit-motivated crime and terrorism, it might be worthwhile, at least in a collective sense. That, arguably, is the rationale of money laundering blacklists and ratings.

The only problem is the tyranny of truth: the anti-money laundering system doesn’t work.

Failure locked in

Despite trillions of dollars and 30 years of prodigious effort, the modern anti-money laundering experiment scarcely has the impact of a rounding error on criminal accounts. By UN measures, the ‘success rate’ of money laundering controls is inconsequential when authorities reclaim a puny 0.2 percent of illicit funds, allowing ‘Criminals Inc’ to keep up to 99.8 percent (my own research puts the figure at 99.9 percent, but who’s quibbling?)

Nonetheless, the practical reality is that reasoned criticism by suffering nations is unlikely to curb the use of economic sanctions. Instead, pressing other countries to the will of a more powerful force is a growth sport.

‘Naming and shaming’ alive and well

The European Union’s attempt to join the ‘name and shame’ World Series was denounced by the dominant player and criticized by countries labeled ‘bad.’ A new list of ‘external’ jurisdictions unilaterally declared ‘deficient’ —initially due to be re-issued this month — is still “on the agenda,” and is now expected in 2020. (Extending the ‘us vs. them’ theme, the EU only pejoratively labels ‘external’ countries, not its member states).

Although the EU methodology was heavily criticized, the system that it seeks to attach itself to remains astonishingly ineffective, for reasons persistently unaddressed. (Ironically, the European police agency, Europol, frankly recognized the scale of policy failure, but its finding that serious crime pays, seriously well, appears to have fallen mostly on deaf ears, like the United Nation’s earlier assessment).

Design flaws

There are many reasons for anti-money laundering’s failure. Most trace back to the rushed development of a compliance model unchanged in three decades, seldom questioned, and seemingly unquestionable. Perverse incentives also harm people trying to do what the system was originally intended to achieve. But the main problem is a persistent focus on the effort and activities to prove compliance rather than what’s needed to achieve better (crime prevention) outcomes.

For example, new ratings meant to fix the problem use the language of ‘effectiveness’ and ‘outcomes,’ absent a functioning effectiveness framework [research paper, free access to January 2020], thereby continuing the 30-year focus on effort rather than results. Despite FATF’s grandiose labeling of its flagship ratings ‘mutual evaluations’, a trio of professors found that there has been “minimal effort” at anti-money laundering evaluation, “at least in the sense in which evaluation is generally understood [in public policy and social science], namely how well an intervention does in achieving its goals.”

Moreover, the rating system’s tick-box mentality encourages a tick-box response to mitigate harms imposed by a system characterized more by good intentions and rhetoric than any cogent measure of effectiveness.

It is, therefore, unsurprising if ‘compliance’ is the unspoken objective of many governments (to ‘get the FATF tick’ and minimize adverse consequences from the system itself), rather than any meaningful crime prevention outcomes.

The hectic nature of anti-money laundering compliance also conceals the reality of poor outcomes. Complicated rules are designed like a giant stack of colanders to catch water, with each ‘gap’ ‘fixed’ by constantly extending money laundering controls to more transactions, businesses, and industries, and more ‘solutions’ touted (increased public/private sector collaboration, law enforcement integration, artificial intelligence, etc). With a steady stream of new ‘solutions’ constantly adding more colanders, it’s easy to miss the big picture, about how much ‘water’ the entire stack of colanders manages to catch. Most ‘solutions’ have some positive effect, but when all combined, over three decades, manage to trap less than one percent of criminal finances, the impact on crime seems marginal, at best.

Conclusion, and options for leaders

The anti-money laundering industrial complex affects every citizen — with higher fees and taxes to pay for hundreds of billions of dollars of compliance costs each year, plus the social and economic impact from serious crime, barely checked. It also makes banking difficult for millions of ordinary people and penalizes smaller, weaker nations, yet the modern anti-money laundering experiment is almost entirely ineffective.

Complicated laws, armies of regulators, and costly compliance tasks give the comfort of activity and feeling of security but don’t make us safe from serious crime and terrorism.

Authentic leaders keen to reduce the social and economic harms from serious profit-motivated crime and terrorism have a choice. They could blindly follow the orders of an unelected agency accountable to no country’s citizens, driven by a few powerful states, in order to get FATF’s tick of approval for implementing its standards, despite scarcely any impact on criminal finances.

Or, leaders might face up to the reality of anti-money laundering’s failure, and consider reframing the system to switch from less than one percent impact on crime into the 99 percent zone, as the G7 intended in 1989.

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Postscript

If any leaders choose the second option, pragmatism suggests that they should still ‘get the FATF tick’ in the meantime.

(88 jurisdictions have so far been assessed in the current round of evaluations, and reports published. Many governments were surprised with lower than expected ratings, but a few — learning the unspoken lessons not recorded in any official guidelines — have begun to operate the system as it’s designed, if not intended, for better than expected ratings, irrespective any ‘real’ [empirical] risk, which, ironically, the current system doesn’t measure).

After all, retaining access to the financial system helps governments extend their own crime prevention capabilities, even if there’s no appetite to reframe the global anti-money laundering system for meaningful outcomes.

The received wisdom is that they represent the ‘time‑value of money’, and therefore should always be positive. Low interest rates are supposed to indicate a high willingness to postpone consumer pleasures. Interest income is also understood as an entitlement, a reward for hoarding rather than spending money.

In macroeconomics, we are told that low interest rates indicate ‘loose money’, which in turn means higher inflation. And we are told that we must engineer interest rates upwards as a means of curbing both residential land prices (‘house prices’ in common parlance) and consumer prices. Recessions are known to be collateral damage of upwardly‑engineered interest rates; but recessions pass, we are also told.

Much of our evidence is from individual nations’ statistics. The problem here is the way countries’ currency exchange rates confuse the picture. By looking here at G7 data, we have the worlds predominant capitalist countries taken together rather than individually. The exchange rate movements between their currencies largely cancel out.

On its own, the charts shows an ambiguous relationship between interest rates and inflation. We should note however, that conventional wisdom suggests it takes around two years for rising interest rates to curb inflation, and for falling interest rates to raise inflation.

The chart shows interest and inflation rates, using the percentage rates on the left‑side axis of the chart. Unemployment rates are read using the right‑side chart axis.

There are certainly instances where falling interest rates are followed by rising inflation – eg early 2000s. And falling interest rates (2009, 2012) followed by rising inflation. We might note that the rising inflation in 2010 and 2011 was mainly due to fiscal stimulus (rather than due to low interest rates); governments choosing to run the very high budget deficits that enabled recovery from the Global Financial Crisis.

In recent years, falling interest rates since 2011 have not been able to raise inflation above the annual two‑percent that is optimal to keep the wheels of capitalism spinning. And interest rates sure have come down. The key global interbank rate – the LIBOR – has been below zero since 2015.

We see that the relationship between interest rates and unemployment is rather more compelling than that between interest and inflation. Rising interest rates clearly bring‑about higher unemployment. Further, it is the rising unemployment that typically – but not always – induces lower inflation. In the chart, falling interest rates were followed by falling unemployment. Unemployment rates, our most critical indicator of recession, show that recessions have been the critical instigator of low inflation.

Indeed, it is fair to say that rising interest rates only curb inflation by creating contractionary conditions; creating recessions or near‑recessions. There is no direct connection between ‘loose money’ (indicated by low interest rates) and ‘high inflation’; or between ‘tight money’ and low inflation’.

By pre-2015 conventions, the developed world liberal‑capitalist economy is now in a sweet spot; low inflation, low unemployment. Annual economic growth is at potentially sustainable levels (eg 2% rather than 3%+). Yet there is much anxiety. Much of the anxiety among the richest 10% is because there were other motives – other than disinflation – for past high interest rate policies. It was through these monetary policies that the 1980 to 2008 ‘class‑war’ between capital and labour was waged. High and compounding interest was understood then as a free lunch by the rich, a means of transferring wealth directly from the poor to the rich.

The 2020s will bring new economic challenges; the challenge of low inflation and negative interest rates as the new norm. This happy state of affairs will not last though, so long as we have economic policy frameworks rooted in the 20th century. Labour shortages are now the big challenge of global capitalism. If policymakers fail to see this – and persevere with fiscal austerity policies (as we see in New Zealand) – then in the late 2020s we should expect a new form of stagflation; high inflation and structural unemployment.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz

This week we take a look at the dual long-term challenges facing farming – protein alternatives and environmentalism.

The Weekly Overview is written by Tony Alexander, Chief Economist at the Bank of New Zealand. The views expressed are my own and do not purport to represent the views of the BNZ. This edition has been solely moderated by Tony Alexander. To receive the Weekly Overview each Thursday night please sign up at www.tonyalexander.co.nz