This is a moment of great peril for the small Caribbean nation of Cuba. Nothing less than its sovereignty is on the line as the US drives its knee into the neck of 10 million Cubans by means of a crushing air and sea blockade and a set of secondary sanctions designed to muscle the nations of the world into compliance to the hegemon.

The issues are not particular to Cuba; we are in the midst of a militant US that is determined to assert domination through force.

It was therefore a pleasure to spend time this week with Luis Ernesto Morejón Rodríguez, Cuba’s Ambassador to New Zealand in Wellington.

Article by AsiaPacificReport.nz

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tax on interest is charged at a person’s marginal rate – commonly known as the secondary tax rate – and is nowadays withdrawn at source.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

All wars incur economic costs, and not only to the directly belligerent countries. The biggest costs arise when a war becomes a prolonged stalemate. The present war in Ukraine can be characterised, differently, as a Russian Civil War (that’s the Russian view), as ‘just another’ Eastern European conflict that will go away by Christmas, or as a World War.

Civil War?

The civil war characterisation reflects the medium-long-term history of the lands between the Ural mountains and the Scandinavia/Prussia/Hungary/Romania frontier that historically demarks cultural Russia from western Europe. (And we note that Russia undertook an eastward expansion of settlement in the same years that the United States pursued its westward expansion of settlement. There was a Wild East to match the Wild West. As a result, both Russia and USA have realms that extend to the Pacific Ocean.) This civil war characterisation, which highlights comparisons with the United States’ Civil War, is very useful to help us understand the likely duration, outcome, and cost of the present war.

While the US Civil War officially lasted for four years (1861-65), significant echoes remain today. There is a schism in the political geography of the United States, with the fracture line today very much the same line as in those years. Whatever happens in Ukraine this year or this decade, a similar fracture line is likely to remain into the 22nd century at least.

To understand how useful the US Civil War may be in helping us to assess the present war in Ukraine, we have to see it in the terms of the political and economic assumptions of each time; and also as a purely military event, taking out the ‘goodies versus baddies’ sentiment. The passion in 1860s’ America was on the side of the secessionist south, just as it is on the side of Ukraine today. There was not a passionate abolitionist (ie anti-slavery) mass movement in the north, though there was a passionate and politically significant movement. The question of what motivated the working and farming men of the north to fight was not unlike today’s question of what motivates Russian men to fight in Ukraine today.

Abraham Lincoln, like Vladimir Putin, was passionate about ‘the Union’; willing to pay a huge price to reforge their respective political and cultural Unions. Less passionate contemporaries, in both cases, saw regime change as a possible end-of-the-war scenario.

In the United States the war followed a ‘phony war’ stage that lasted through most of 1861, and then descended into a brutal stalemate which lasted until the second half of 1864. Lincoln, elected in November 1860, faced re-election in November 1864. For all money, he would suffer a landslide defeat in 1864; that is, until the military situation turned in his favour (especially the capture of Atlanta) just months before the 1864 election. Fortunes turned, and Lincoln won in a landslide. He was helped by the non-participation of the south in that election. Indeed it would take more than a century before Lincoln’s Republican Party would gain electoral traction in those southern states; and then only when – in the late 20th century – the two parties swapped places. (It was only recently that, in the US, the party of the south became the party of the north; and vice versa.)

Abraham Lincoln’s ’emancipation proclamation’ on 1 January 1863 was a wonderful piece of political theatre, that proved to be a masterstroke that both enabled the abolitionist cause to be fulfilled in the event of a Union victory, and formed an important part of the basis for Lincoln’s subsequent legacy. At the time it had as much impact as Putin would have if, later this year say, he were to declare an end to people-trafficking in Ukraine; Lincoln in 1863 had no practical jurisdiction over the people whom he notionally emancipated.

An important parallel to note is that it was the southern side in the US Civil War that was then most connected to the world economy, and thus it was the loss of the southern economy that incurred the greatest economic costs to the interested European powers. The (southern) Confederacy looked to the United Kingdom and France to provide military support. In the end the military support given to the south was vastly less than hoped for. There was no expectation, in America or Europe, that the European powers would provide assistance to Lincoln and his armies.

The analogy between the Ukraine War and the US Civil War suggests that the present war will most likely be, for years, a costly stalemate. Deutsch Welle, in its ‘To the Point’ (16 July) listing, said: “After capturing large parts of Donbas, will Putin have an appetite for more?” This western perspective makes Putin seem like a Viking raider who has a ‘bit of fun’ in the borderlands, and then withdraws for a short or long while. The idea that Putin, this year, might simply ‘pack up his toys and bring his boys home’ represents a substantial misreading of the motivation of Putin and the many influential Russians who will continue to promote this fight for Russian prestige and territory. Like Lincoln, I don’t see Putin as a quitter. And it’s not clear that, if something happened to Putin – like dying of covid – the war in Ukraine would necessarily fold.

The popular western perspective is that the war in Ukraine will somehow fizzle out after a few more months, and that the costs of the war to the rest of the world will be short-lasting and reversible. A similar view also existed in 1861, in the north of the United States.

World War?

Has World War Three already started? It’s not really a silly question. (Before putting in my two cents worth, I would like to note that I am inclined to agree with those historians who see WW1 and WW2 and a single event with a 21-year interregnum. In that case, that would be the GWW [or GWW1], Great World War, and what we shall call WW3 might prove to be the GWW2 (or GWW3 if we designate the Cold War as a Great World War, as I think we should). We should also note that the timing of the beginning of most wars is subjective. A good case can be made for dating the beginning of WW2 to 1937, with Japan’s invasion of China.)

There is a case that the Cold War should be classed as a ‘World War’. It was a war lasting from July 1945 (with the Soviet Union’s declaration of war against Japan) until the final demise of the Soviet Union in 1991. The hottest components of the Cold War – Korea, Vietnam, Afghanistan – continue to have repercussions today. So do many of the colder components of that war; especially the break-up of the Soviet Union.

(Under this GWW perspective, both GWW1 and GWW2 were nuclear wars. This is because the dropping of atomic bombs on Japan represent both the end of GWW1 and the start of GWW2.)

Like the other world wars, the Cold War split the world into three: indeed, we came to talk about the ‘first world’, the ‘second world’, and the ‘third world’. In some contexts, China was ‘third world’; in other contexts, it was a recalcitrant part of the ‘second [“communist”] world’. Like GWW1, there was an interregnum in the Cold War; the early 1970s, essentially the later years of Richard Nixon, and the short presidency of Gerald Ford. The Cold War – GWW2 – was reheated during the Jimmy Carter presidency, especially due to the influence of cold warrior Zbigniew Brzezinski. 1980 was a particularly belligerent year.

The dramatic economic events of the 1970s were a consequence of both the Cold War; and of a regional war that goes back to biblical times and will probably continue until the end of time, the Arab-Israeli War. The first episode of the ‘Great Inflation’ can be attributed to the Vietnam War, the quintessential hot war of the Cold War. The second ‘stagflationary’ episode of that inflation is usually attributed to the 1973 episode of the Arab-Israeli War, and its consequence for world oil prices; though the political response that pushed the Great Inflation well into the 1980s was as much a result of a form of capitalist ideology – monetarist neoliberalism – that had its origins in the earlier years of the Cold War.

The War in Ukraine has already divided the world into three. Aotearoa New Zealand has unambiguously taken sides as a western non-combatant belligerent. It’s not a simple proxy war between Russia and Greater NATO. Türkiye, a NATO member, has taken a much more ambiguous position than New Zealand has. Even though the fighting, so far, has only taken place on the territory of Ukraine, the costs of the war so far have been substantial. And global. And, as in the first months of World War 2 or the US Civil War, we may have only experienced the ‘phony’ part so far.

This war sets the scene for a new economic crisis that will most likely last until at least 2050. Much was already in place before this Russian war started in 2022 (though some would argue that this war started in 2008 or in 2014). The Covid19 pandemic has revealed how brittle the world economy is, and how easily knowledge gives way to narrative. In particular, the pandemic has revealed how brittle ‘first world’ labour markets are, and how dependent the privileged are on an exploited pool of global labour.

In addition, we have the global environmental crisis, which is about global emissions induced climate change; and much more. Indeed, in order to manage the new climate extremes, we have to burn more fossil fuels than ever; to run our air conditioners, our heaters to manage the cold, and to construct the infrastructure which we need to, among other things, keep out the floodwater. We are in a dangerous positive feedback loop, which means we have to aggravate the crisis in order to mitigate it.

Also, in the west in particular, there have been what might best be called the ‘culture wars’. The result is that, within the west, there are two large politicised groups of people who see their adversary as tantamount to ‘evil’; this wickedness of the other side becomes the corrupted lens which makes it close to impossible to define and discuss the very real crises that humanity both faces and imposes. The latest round of the culture war is the resurfacing of the abortion issue. In the United States today, the culture war does have significant overtones which date back to the Civil War.

The pandemic (presented as a war between man and microbe), the 21st century labour crisis with all its cruelties, the culture wars, and climate change all set the scene. The war in Ukraine – already GWW3 by my reckoning – is the spark that is escalating the present conflict. The latest symptom of escalating warfare is the ‘cost of living’ crisis.

Global Inflation?

We are clearly facing global cost crises; rises in real costs due to pandemic and the political measures taken to deal with it, due to environmental change and its costs (including substantial and largely ineffective bureaucratic costs), rising labour costs arising from the massive disruptions to the pre-2020 globalisation of labour, and now war shortages which so far mainly impact the prices (and availability) of staple foods and fossil fuels. A big part of the problem is that, in the west, there have been no serious attempts to cost the Ukraine War. Instead, there has been the pretence that it will just go away; the equivalent to the ‘over by Christmas’ assumptions made in 1861 and 1914 (and 2003 for that matter).

As well as properly assessing the costs of the war, and of the other crisis, a rational response must be to find reasonably equitable ways to share this cost burden. It would have been so much easier if principled income distribution mechanisms had already been in place prior to this crisis decade. We do expect that, in a war, the direct belligerents will face particularly high costs; but we also understand that, in a world war, all of humanity must bear some of the cost.

Yet, when we see countries’ consumers price indexes rising (so far by no more than an annual ten percent in most western countries), we disembody our minds from the real and rising costs ‘out there’; and we expect our politicians to roll out some kind of magic solution. We want them to magic away real costs; in practice that means we expect them to shift the cost burden to other people, especially people in countries or continents other than our own (such as Africa). We, en masse, still expect the very real and substantial crises of the world to be costless to us in our daily lives. Too many of us still see these crises as akin to dramas that we watch on television; as being like multi-season Netflix drama series.

An inflationary spiral takes place when non-powerless people seek compensation from real costs. (Cost crises are not the only inflationary situation. Macroeconomists tend to follow a one-size-fits-all analysis of inflation, based on ‘excess demand’ rather than on ‘increased cost’. So they, in the role of central bankers, rush to increase costs in the form of higher interest rates; whatever the underlying problem. And once one country does it, others are forced to follow in order to stop their currencies’ exchange rates from falling; depreciating currencies make their countries’ inflation rates higher than the global average.)

The first law of holes is ‘stop digging’. But it’s very hard to stop digging when you are in a ‘race to the bottom’.

*******

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.

A View from Afar – In this podcast, political scientist Paul Buchanan and Selwyn Manning will approach this episode in two parts.

First we will detail what to expect from the NATO leaders’ summit, which includes addresses from the prime ministers of Japan, Australia and New Zealand.

Why is NATO including addresses of NATO partners in this year’s leaders’ summit? 

And secondly, are we beginning to see changes to the pre-pandemic globalisation framework? Are we witnessing a response to the breakdown of the global economic order?

If so, what does the emergence of near-shoring and friend-shoring mean for supply-chain issues, cost of living, and the global economy?

Join Paul and Selwyn for this LIVE recording of this podcast while they consider these big issues, and remember any comments you make while live can be included in this programme.

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

If you miss the LIVE Episode, you can see it as video-on-demand, and earlier episodes too, by checking out EveningReport.nz or, subscribe to the Evening Report podcast here.

The MIL Network’s podcast A View from Afar was Nominated as a Top  Defence Security Podcast by Threat.Technology – a London-based cyber security news publication.

Threat.Technology placed A View from Afar at 9th in its 20 Best Defence Security Podcasts of 2021 category. You can follow A View from Afar via our affiliate syndicators.

New Zealand’s leading daily newspaper has praised the “gift of inspiration” over global cooperation in launching the James Webb space telescope at the Christmas weekend, but has decried the failure of the international community to seriously tackle the growing covid-19 public health crisis cooperatively.

The New Zealand Herald declared today in an editorial that the timing, cooperation, and development work involved launching the successor to the Hubble telescope “is in marked contrast with the still muddled, individual country-based approach to the pandemic”.

The launch also could not help but “signify the yawning gap between what people are capable of and what they commonly settle for”, the newspaper wrote.

The launch of the James Webb telescope was a collaboration between the space agencies of the United States, Europe and Canada with people from 29 countries having worked on the project, reports AP.

“It blasted away from French Guiana on a European Ariane rocket. As with previous space missions, it involves vision, ambition and precise calculations that have to work perfectly to pull it all off,” the Herald said.

“The telescope has a 1.5 million km journey ahead, far beyond the moon, with a task of eventually gazing on light from the first stars and galaxies.

“It all hinges on the telescope’s mirror and sunshield unfolding on cue over nearly two weeks, having been tucked away to fit into the rocket’s nose cone.

“If that goes right, the telescope will be able to look back in time a mind-boggling 13.5 billion years.”

Fascinating year for science
The US$10 billion telescope project had capped a “fascinating year for space science” after the “incredibly precise landing of a rover and a helicopter drone on Mars, which resulted in the first powered flight on another planet”, said the Herald.

Noting Nasa’s science mission chief Thomas Zurbuchen’s comment welcoming the launch — “what an amazing Christmas present” — the newspaper contrasted the collaborative achievement with the “muddled, individual country-based approach” over covid-19.

“While the rocket was launching humanity’s imaginative time machine, hundreds of thousands of people on Earth were getting a ‘gift’ of covid at Christmas. Both Britain and France hit more than 100,000 cases on Saturday,” the Herald said.

“The cost of the space project is tiny compared to the US$725 billion the US spent on defence in the 2020 financial year — more than the next 11 countries combined. Next year’s bill is US$770 billion.

“It is closer to the US$50 billion amount the OECD has estimated it would cost to vaccinate the world’s population against the coronavirus and protect the global economy.

“Far more money than that — US$12 trillion — was spent by countries in financial support between March and November 2020.

Time to hatch global covid plan
“Although that support was urgently needed, surely there was also time to hatch a US$50 billion global plan for a coronavirus endgame before the vaccines came on stream in late 2020.

“Now, a year later, each country is dealing with the omicron wave its own way, and progress in distributing vaccines to poorer regions is slow. People feel frustrated the vaccines haven’t guaranteed a return to life as we knew it.

“The vaccines themselves are an amazing scientific achievement: developed quickly and still doing their job of protecting the vast majority of vaccinated people against severe covid disease.

“A study by the World Health Organisation and a European Union agency estimated in November that the vaccines had saved nearly half a million lives in a region of 33 countries.

“But it is hard for people to really absorb achievements that involve prevention: When they work as hoped, at least some people believe it’s proof the threat was overblown.”

Article by AsiaPacificReport.nz

A View from Afar – In this podcast, Paul G. Buchanan and Selwyn Manning analyse how supply-chain bottlenecks, a global economic reset, and post-pandemic security are about to trigger a new era in geo-economics.

Wherever you are around the world, if you haven’t yet experienced the impact of supply-chain pressures, then you soon will.

As 2021 edges toward a conclusion, everyone and everything is impacted by supply-chain pressures. This problem laps at your front door with you waiting for your online-ordered-product to be delivered. And, it scales up to monumental proportions as global super economies wait for the latest shipment of iron ore or semi-conductors to dock in port.

At this stage along the global-pandemic timeline, supply-chain bottlenecks are a huge problem that impacts on every sector of our lives from the petrol our vehicles consume to the rice we have with our meals.

And this problem is going to get more challenging as countries move to seek a best-case-economic-advantage as the world slowly emerges out from the shadow of Covid-19.

We have all heard a lot about a new world emerging in the post-pandemic period.

• But what will this look like?
• What impact will global change have on domestic, regional, and global economies?
• And, how will global powers react to a redefined world economic order?
• If change is coming, and it is, then how can the world re-emerge from this pandemic-period, and ensure progress and security are in sync?

Progress and security, that will be the next challenge of our times.

Remember to join Paul and Selwyn for future LIVE recordings of of this podcast. And remember any comments you make while live can be included in this programme.

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

If you miss the LIVE Episode, you can see it as video-on-demand, and earlier episodes too, by checking out EveningReport.nz or, subscribe to the Evening Report podcast here.

The MIL Network’s podcast A View from Afar was Nominated as a Top  Defence Security Podcast by Threat.Technology – a London-based cyber security news publication.

Threat.Technology placed A View from Afar at 9th in its 20 Best Defence Security Podcasts of 2021 category. You can follow A View from Afar via our affiliate syndicators.

A View from Afar – LIVE @ MIDDAY Thursday October 14: In this podcast, Paul G. Buchanan and Selwyn Manning will analyse how Taiwan is delicately navigating its way between two clashing global powers. On one side there’s China and on the other is the USA.

Taiwan has been self-governing for over 70 years. It insists it wants to remain an independently governed economy.

But recently, the People’s Republic of China’s leader Xi Jinping stated China wishes to reunify Taiwan and assert control over the South East Asia nation.

And, on the other hand, the United States of America has restated its defence commitment to Taiwan. The Pentagon this week said the US’ commitment to Taiwan is rock solid, and, in recent weeks it has been reported that US military forces have been present on Taiwanese soil.

But how committed is the US really? Will the US come to Taiwan’s defence should China invade?

And, what would China gain strategically if it did invade, and, what would China lose if a regional conflict occurred?

Taiwan’s leader said this week that it will not submit to China’s will on the issue of its independence, but rather it will use diplomacy to find a way through – that is unless China did invade.

So what is the most likely outcome of this situation? How can China back off, save face, and get back to the business of economic mutual interest?

Join Paul and Selwyn for this LIVE recording of this podcast and remember any comments you make while live can be included in this programme.

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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The world is emerging from the biggest social and economic shock in living memory, but it will be a long time before the deep scars of the COVID-19 pandemic on human well-being fully heal.

In the Asia-Pacific region, where 60 per cent of the world lives, the pandemic revealed chronic development fault lines through its excessively harmful impact on the most vulnerable. The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) estimates that 89 million more people in the region have been pushed back into extreme poverty at the $1.90 per day threshold, erasing years of development gains. The economic and educational shutdowns are likely to have severely harmed human capital formation and productivity, exacerbating poverty and inequality.

The pandemic has taught us that countries in the Asia-Pacific region can no longer put off protecting development gains from adverse shocks. We need to rebuild better towards a more resilient, inclusive, and sustainable future.

We know that the post-pandemic outlook remains highly uncertain. The 2021 Economic and Social Survey for Asia and the Pacific released today by ESCAP shows that regional economic recovery will be vulnerable to the continuing COVID-19 threats and a likely uneven vaccine rollout. Worse, there is a risk that economic recovery will be skewed towards the better off – a “K-shaped” recovery that further marginalizes poorer countries and the disadvantaged.

Building a resilient and inclusive future

The good news is that countries in Asia and the Pacific have taken bold policy measures to minimize the pandemic’s social and economic damage, including unprecedented fiscal and monetary support. Last year, developing countries in the region announced some $1.8 trillion, or nearly 7 per cent of their combined GDP, in COVID-19 related budgetary support. But investments in long-term economic resilience, inclusiveness, and green transformation have so far been limited.

The region’s vulnerability to shocks like COVID-19 was heightened by its lagging performance towards achieving the Sustainable Development Goals, which would have enhanced resilience by reducing entrenched social, economic, and environmental deficits.

The evidence shows that we need a better understanding of the Asia-Pacific region’s complex risk landscape, and a comprehensive approach to building resilience in the wake of the COVID-19 crisis. Building resilience into policy frameworks and institutions will require aligning fiscal and monetary policies and structural reforms with the 2030 Agenda for Sustainable Development.

ESCAP research maps out a “riskscape” of economic and non-economic shocks – financial crises, terms-of-trade shocks, natural disasters, and epidemics – and shows that all adverse shocks have cause severe damage to the region’s social, economic, and environmental well-being. It takes several years for investment and labour markets to return to their pre-crisis levels. Adverse shocks also leave behind long-term scars by widening inequality and increasing pollution. But bold policy choices can reduce setbacks. Governments must implement aggressive policy responses to protect hard-won development gains.

Notably, policy packages should align post-pandemic recovery with the 2030 Agenda. ESCAP recommends a policy package focusing on three areas – ensuring universal access to health care and social protection, closing the digital divide and strengthening climate and energy actions. Estimates show that such an approach could reduce the number of poor people in the region by almost 180 million and cut carbon emissions by about 30 per cent in the long run.

Resilience is largely affordable

Building resilience does not add too much financial burden to the region if such investments are accompanied by bold policy actions, such as ending fuel subsidies and introducing a carbon tax. A range of policy options can meet immediate and medium-term financing needs with great potential for Asia-Pacific countries to leverage these options.

However, it is important to note that several countries will need to engage closely with international development partners and the private sector. Least developed countries with significant “resilience gaps” will also require international assistance. Developed countries that fulfil their Overseas Development Aid (ODA) and climate finance commitments will go a long way in scaling up long-term investments and addressing these countries’ vulnerability to shocks.

COVID-19 has been a trauma like no other. Yet, it offers a unique opportunity for governments and other stakeholders to chart a new path to rebuilding. Whilst being forced to adjust, the Asia-Pacific region has seen fundamental transformations in lives, workplaces and habits. It is high time that the region takes its lessons from this pandemic and commits to a foundation that ensures a solid ability to withstand future jolts to the system without its people, and the planet, having to again pay a high price.

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Ms. Armida Salsiah Alisjahbana is the United Nations Under-Secretary-General and Executive Secretary of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP)

“If the nations of the world fail to honour the pledges they made in Paris, the climate could return to Pliocene conditions when okapi-like creatures and giant vipers thrived in Europe. … Ernst Haeckel’s name for our Neanderthal ancestors, homo stupidus, may yet have some validity – for us.”
Tim Flannery, Europe a Natural History, 2018.

Recently I wrote about the Neanderthal ancestors of all of us who are not of pure African ethnicity. These early European and Asian ancestors luckily escaped being consigned to the dustbin of racist history, under the label homo stupidus.

This name contrasts with the name earlier conferred on our own species – homo sapiens – which means ‘wise upright primate’. The question here is: Has our own species done enough to earn the ‘wise’ marque. Maybe our species is ‘clever’ but not ‘wise’? Or maybe we are basically stupid? Or both clever and stupid?

Savings, Investment, and Stupidity

“It’s a question of rationality [not ideology] if I may say; never before has humanity had so much money, we have the largest pile of savings and liquidity in the history of humanity. By comparison, the proportion of savings that we are ploughing into investment – investment into the future, [for example] into the green transition … the amount that we are investing as a proportion of total savings has never been lower in the history of the world; that is stupidity in action, and you don’t have to be a left-winger or a right-winger to agree with that.” Yanis Varoufakis, Upfront, Al Jazeera 20 Feb 2021

In the quote above, prominent Greek political economist Yanis Varoufakis makes the point that our collective failure to invest the massive amounts of capital that we now have is the epitome of stupidity. Sure, we were clever to be able to accumulate so much capital; but what’s the point if we refuse to use it? What kind of mother or father would choose to malnourish the rest of the family when their fridge was full with good food, and then allow most of that food go to waste?

In classical economics (aka ‘the dismal science’) – the liberal description of capitalism that dates back over 200 years – the key conclusions were that investment creates growth, and that growth (and only growth) could stave off the inevitable ‘stationary state’ in which everyone except spendthrift landlords would subsist in a state of poverty. (Varoufakis believes that we are well on the way to a version of that stationary state, through a transition from capitalism to ‘techno-feudalism’; a transition that he believes has already been taking place.)

Classical economics was underpinned by an economic ‘law’ dubbed ‘Say’s Law’ – named after French political economist Jean-Baptiste Say, but which could equally have been called ‘Mill’s Law’, after the Scottish-born intellectual James Mill. Say’s Law says, in effect, that ‘supply creates its own demand’. (The law was invoked by the new capitalist political class to assert that ‘great depressions’ – known 200 years ago as ‘general gluts’ – could only persevere if government investments and relief programmes prevent markets from self-correcting.)

In a twentieth century context, Say’s Law says that ‘savings creates its own private investments’; in other words, the law says that it impossible to have uninvested savings. (One of the jokes about 1980s’ neoliberalism was that, while uninvested savings might be observed, because they were impossible in theory then the observation could not be true. The corollary – allegedly subscribed to by Treasury – was that policies which worked in practice should be eschewed in favour of policies that worked in theory, in their theory.)

Say’s Law, while true in a meaningless tautological sense (in which unspent income is defined as ‘unintended investment’, and in which unemployment is ‘voluntary’), is false in any practical sense. It was John Maynard Keynes – in his 1936 opus The General Theory Employment, Interest and Money – who comprehensively exposed the fallacy of Say’s Law. Keynes (who understood economics not as the dismal science but as the ‘science of happiness’) – and some others – could clearly see that the Great Depression of the 1930s was a period in which many people saved (and many others attempted to save) an unusually high percentage of their incomes, while an unusually low proportion of their nations’ incomes would be committed to investment spending (spending for the future). Money just sat there, unspent, for over a decade in some countries. Poverty stalked the world, in the midst of plenty. Homo stupidus reigned. In our part of the world, some of the Labour politicians in the Australian state governments were amongst the stupidest of all, determined to balance their budgets at any cost. (It’s lucky that New Zealand waited until 1935 to elect a Labour government!)

(In its historical context, 1980s’ neoliberalism represented the rejection of 1930s’ style Keynesian economics in favour of a return to 1800s’ style classical economics. By and large, the left-wing intellectual class was missing in action in the 1980s; instead descending into the rabbit hole of new identity politics, quite distinct from the 1930s’ national socialist rabbit hole of old identity politics.)

In the world today, most of the money that would be otherwise unspent is directed into the acquisition of existing assets – especially land (also equities) – in a speculative process that the political class incorrectly call ‘investment’. (Over the road from my house is a real estate sign that, underneath the word ‘SOLD’ says ‘LAND IS THE NEW GOLD’.) Land-hoarding represents a blight on our cities. We should note from our untaught history that land speculation is New Zealand’s true national sport – not rugby – and that, in New Zealand, land speculation has a continuous history dating back at least two centuries.

Tim Flannery and Yanis Varoufakis emphasise the need for green investment; for public spending – and for incentivised private spending – that leads us towards a decarbonised and democratic world. And, while the future benefits of such spending are substantial, Varoufakis emphasises that – at least in present times – the economic cost of such investment is trivial. Modern homo stupidus believes that land speculation should take priority, as an outlet for unspent income, over future public investment. The problem with future public investment – homo stupidus believes – is that we will end up owing ourselves too much money; better, he believes, to balance the books at zero on both sides.

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Keith Rankin, trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland.

contact: keith at rankin.nz

Precis: This article takes the WHO as an example to examine the difficulties for some international organizations in playing their due roles and tackling with the security threats of international concern such as a public health crisis of COVID-19. It is believed that an in-depth institutional reform is necessary for international organizations including WHO to adapt to the reset of globalization, the ensuing global challenges, and the transformation of global governance in the post-pandemic order.

Confronting the public health crisis as COVID-19, the existing global governance system has fallen into a state of partial failure, which is embodied in slow response and action of international organizations, increasing difficulty in coordination and cooperation between big powers, and the lack of leadership. WHO is clearly unable to coordinate national actions or to regulate behaviour and change prevention and control measures of various countries amid this pandemic. In recent years, the impediments to globalization, the rise of populism, the revival of nationalism and unilateralism allude to the inherent conflicts between international organizations and sovereign states. Disease is a non-zero-sum non-traditional security issue as its threat to all is undifferentiated. Since everyone is facing a common threat, international organizations that are instrumental for communication and preventive solutions should take the lead. But why some international organizations failed to function and why can it be hard for countries to utilize such platforms and work together? This article analyses that there are several major dilemmas restraining the role of international organizations, which are unlikely to be resolved in the short run. The following takes WHO in the pandemic as an example to explore its plight.

Difficulties and Dilemmas Confronting International Organizations

Above all, the WHO faces constraints from the sovereign states.

The first hinderance is financing. The most common way for all parties to play games in WHO is to influence the WHO agenda through financial leverage. WHO’s funding comes from two main sources: assessed contributions and voluntary contributions largely from member states and other sources such as philanthropic foundations and private sector. Assessed contributions have been a declining share of WHO’s overall budget in recent years, so the organization is increasingly relying on voluntary contributions. The trick is that most voluntary contributions come with explicit requirements and restrictions on their use. The only fund that WHO really has control and can flexibly allocate is about US$500 million a year in assessed contributions. WHO has been struggling to both invest in global public health and to cover its own operating costs. Take the 2018-2019 biennial budget as an instance, the total planned amount was US$4.422 billion (the actual implementation was US$5.3 billion), of which the assessed contributions were only US$957 million. As the biggest contributor to WHO, after President Trump announced a suspension for US funding on April 14, 2020, Director-General Tedros indicated that the US move would leave the organization with a financial gap that could interrupt the efforts to stop the coronavirus pandemic. When the greatest power takes an example, it is hard for others not to follow suit, particularly under the situation where all economies are suffering heavy losses.

The second is the recognition. As an intergovernmental organization, WHO has the legitimacy and capacity to act only based on state empowerment and authorization. In a broad sense, this “authorization” is also a recognition. A recognition of the existence and effectiveness of international organizations. Given the limits of human knowledge of various communicable diseases, WHO remains torn between taking initiative and being cautious in the event of an outbreak. After the outbreak of influenza A (H1N1) in 2009, WHO coordinated countries to take proactive measures and declared a “pandemic”, but was accused of “overreacting”. This was because H1N1 had been spreading all over the world, but the fatality rate was low. A joint report by the British Medical Journal and the Parliament of the European Commission criticized WHO for exaggerating the pandemic, causing panic among the public and triggering a global rush to buy vaccines for pharmaceutical companies to profit. After the Ebola outbreak in West Africa in 2014, WHO was accused of poor early warning, ineffective prevention, and slow response. Critics claimed that the first Ebola patient was infected in Guinea in December 2013, but WHO did not officially declare an outbreak until three months later, when the virus had spread to neighboring countries. In this recent crisis, WHO’s status and value have been further weakened. During the present anti-pandemic process, the Trump administration continuously accused WHO of acting too slowly to sound the alarm about the coronavirus. A great power refuses to admit the role of WHO is parallel to not recognize and distrust the organization, which will inevitably impact the international organization’s authority and capability to act in its field. Facing public health threats, particularly from unknown viruses and emerging infectious diseases, WHO seems to be caught in a paradox: taking aggressive action to stop outbreaks before the situation becomes serious will be criticized as overreacting; and taking cautious attitude would be blamed for failing to contain the pandemic. The anarchy of international system makes international organizations have no coercive power in implementing measures. One of the authoritative sources of them is the level of expertise rest on knowledge. They hold the “power” to master data, publish information and set standards by virtue of their knowledge. Therefore, if a country questions its expertise, it can affect a range of the organization’s actions. If countries no longer use that knowledge as a standard, the authority of the organization will be undermined.

Secondly, the WHO is influenced at the systemic level.

First of all, international organizations are the product of globalization and multilateralism. In theory, the deepening of globalization should become a hotbed for the development of international organizations. In reality, nevertheless, globalization has deepened the antagonism between countries. We are witnessing more clearly the gap between countries and the changing political landscape within them. Some countries have risen in the process of globalization, while others have been divided in the process. Rising nations are more insistent on globalization, while declining nations only want to retreat. International organizations seem to become a burden no longer needed, living in the tension between the cracks. As a sub-agency of the UN system, WHO seeks to place health goals above power politics. But as an intergovernmental organization, WHO cannot avoid the shades of power game and geopolitics. As early as its establishment, the Constitution of the World Health Organization was delayed by the ratification of member states due to the confrontation between two camps of the U.S. and the Soviet Union. It was not until the outbreak of cholera in Egypt’s Suez Canal area that countries realized the importance of establishing a global public health organization and passed the Constitution in 1948. With the launch of the Marshall Plan, the eastern and western camps entered a period of fierce confrontation. In 1949, the Soviet Union led the Eastern European countries withdraw from WHO. In order to maintain the integrity of global public health system, then Director-General George Brock Chisholm retained the membership of the Soviet Union and other countries on the ground that there was no opt-out clause in the Constitution, so that the Soviet Union was able to rejoin in 1958.

Second, the new world pattern is evolving, and some countries are inclined to politicize global issues. The alleged politicization of health issues refers to use health issues as a tactic to pursue political goals. The introduction of political issues into WHO by some countries led to the dysfunction and overloading of the mechanism beyond WHO’s jurisdiction and weakened its original purpose of promoting public health. When Trump halted funding for WHO, he also expressed his dissatisfaction and anger at WHO’s repeated praise for China’s anti-epidemic efforts. He believes that the U.S. is investing a lot of money, but WHO is ultimately standing up for China. International organizations do not necessarily choose sides, but their support for one country in a certain area may be regarded as a preference to be resisted by the other party. WHO, in this case, is unwittingly entering the political gap between China and the U.S. Mutual recriminate and stigmatization, transfer domestic contradictions as well as shirk responsibility for the poor response to the pandemic aggravate the conflicts and frictions that already existed among member states, thereby result in the inefficient operation of international organizations. In this climate of mistrust and disunity, it is hard for all parties to act in concert.

Third, non-neutral rules of global governance are impacted. The current global governance system mainly relies on the rules formulated by western countries. However, these rules are non-neutral in the light of non-western cultures. That is, the meaning of the same system varies to different groups, and those who benefit from the established system or may benefit from some future institutional arrangement will strive for or maintain institutional arrangements that are favorable to them. Global governance rules exist upon intersubjectivity and only play a normative role if they are accepted by the majority. Non-neutral rules are difficult to promote consensus between western and non-western cultures. One consequence of this non-neutrality is that in the practice of global governance, the actual benefits or losses brought by different mechanisms to sovereign states are inequivalent. In an era when the developed economies dominate in the global governance system, such non-neutrality, while has always existed, is not as prominent as it is today with more and more non-western economies rise and enter the global governance system. This is illustrated in the case of COVID-19 striking big powers, as non-western actors are bringing their own practical experiences into the existing governance system, thereby shaking the governance structure dominated by the Western instrumental rationality. The concepts, principles and approaches of global governance begin to fall short in attuning to the reality of rapid development of globalization and the emergence of global challenges.

Lastly, the WHO has self-deficiencies in terms of operating rules and mechanisms.

First, WHO is already the largest and most authoritative international agency for epidemic prevention in the world, but it is still unable to play a leading role in this crisis. This is because international organizations and states are distinct in nature. States have sovereignty, while international organizations do not. Management personnel in international organizations are dispatched by member states, and there are no individuals independent of the state and belong exclusively to an organization. This makes it impossible for international organizations to operate in complete isolation from states. Additionally, an international organization is a platform where member states gather for discussion, vote to reach a resolution, and implement it. Basically, the consensus of major powers becomes the resolution of the international organization. That is, a balance exists between the views expressed by the representatives of member states within WHO. Leaders of international organizations has only the power to implement the policy. Taking the position of chief balancer, Director-General Tedros may be viewed as a consensus-maker instead of an authoritarian decision-maker. International organizations, whether intergovernmental or non-governmental, are coordinating bodies. Their decision-making power is limited. Whether member states, especially the big powers, have shared interests, common needs and collective policy orientation determines how much role the international organization can play.

Second, WHO has an “institutional inertia”. Its reform of governing structure lags behind the development of global health governance with its influence on the decline. Since 1999, the principle of zero growth has been introduced into the budgeting process of WHO. Consequentially, WHO is increasingly dependent on voluntary contributions and has shown a bilateralism in promoting projects, since most contributions are earmarked for specific purposes by donors. As some scholars note, voluntary contributions militate against multilateral governance and decentralize the authority of international organizations to donor countries.

All in all, from the perspective of internal factors, academics generally believe that WHO’s organizational culture is strongly functionalist, conservative, and increasingly corrupt in recent years. The failure of strategic planning and the over-decentralization of WHO’s structure render its internal system increasingly rigid. Moreover, there are issues of impartiality within WHO. As more and more information about WHO’s internal decision-making is exposed by the media, the fairness and transparency of WHO’s work are increasingly questioned. Many scholars agree that the financial interests of the medical experts who advise WHO on decision-making are intertwined with multinational pharmaceutical companies, making WHO difficult to be objective and neutral.

To date, no substantive breakthrough and sustainable progress have been made in any area of governance, terrorism, financial crisis, transboundary disasters, and climate change, etc. COVID-19 represents yet another failure of global governance. The root cause is the lack of international cooperation. In recent years, with the strong backtracking of populism, unilateralism, and power politics, international relations are shifting toward geopolitics, the sense of international responsibility and the trust of international community are declining. It seems that everyone knows the theory of win-win cooperation, however in reality, the spirit of cooperation is easily concealed, forgotten, and even deliberately abandoned.

Some Recommendations on Institutional Reform in the Post-Pandemic order

In the post-pandemic world, international organizations and multilateral mechanisms will face greater tests. Only through constant institutional reform can they adapt to a changing world order.

The first is to boost the leadership and appeal to perform the leading and coordinating role to full potential in global governance. The authority and expertise of international organizations are mainly reflected in the fairness and effectiveness of promoting international cooperation and solving global issues. This depends on the sufficient cooperation and support of member states on the one hand and on the strategic vision, leadership, and professionalism of international organizations from officials to staff, on the other. In response to global challenges like COVID-19, the UN needs to make corresponding reforms and adjustments. This would include convening relevant meetings at the earliest possible time to convey confidence to the world, unifying the goals of all parties, and drawing up global action roadmap. Specialized agencies under the UN need to carry out separate actions around their respective themes, update their own rules and norms in real time. WHO could be more empowered to upgrade the global public health governance system. The international community has had conducted some effective bilateral and local cooperation and gained positive experiences in the fights against SARS, H1N1 influenza and Ebola, but there is still a long way ahead to achieve global, sustainable and closer cooperation. It is necessary to improve the overall status of public health governance and reinforce WHO, so that it has more rights and higher international status similar to that of the IMF and the World Bank to organize experts and focus on scientific research, vaccine development and data sharing as well as help developing countries with weak health infrastructure to improve their response capacity. The international community has generally been underinvesting in public health. As of February 29, the U.S. was still more than half behind with its 2019 dues and US$120 million is defaulted for 2020. After the outbreak, the COVID-19 Solidarity Response Fund has been created by the UN Foundation, the Swiss Philanthropy Foundation and WHO, but similar efforts should be more institutionalized in future. Meanwhile, WHO must strengthen the institutional construction, such as build a global infectious disease monitoring, early-warning and emergency-boot mechanisms, further elucidate the rules and norms of public governance, formulate guiding principles that all countries must abide by, unify standards, and improve the control and binding force on relevant behaviors of various countries, but not limited to report information, temporary research and judge the situation. For now, though the role and status of WHO in global public health governance has been weakened to a certain extent, as the largest international health organization and one of the larger specialized agencies within the UN, WHO still has broad responsibilities to combat infectious diseases based on the Constitution of WHO and designated by its accession to the UN, as well as has the only authorization of leading and promoting effective development of international health law. Therefore, it is crucial to carry out effective reform of WHO. The direction is not “reprimand and denounce” by some member states targeted others and counteract each other’s efforts. Instead, it should be further enhancing the power of existing multilateral mechanisms, increasing financial support, and expanding bilateral or small multilateral public health cooperation to larger regional domain. For this purpose, the established China-Japan-ROK joint prevention and control mechanism and the public health cooperation within the ASEAN framework should be consolidated and then upgraded to the Asia-Pacific region. The European Union and the African Union should also act together and promote the integration of public health, and then on this basis, form the regional cooperation between Asia and Europe, among Asia, Europe and Africa as well as in a wider range.

The second is to strengthen the authority and expertise of international organizations. Globalization has never been entirely positive as a single-dimensional process. International organizations is the central force and the primary driver for global governance. The multilateral cooperation mechanism should include at least two functions: political leadership and advisory implementation. In the current international system, it is unrealistic to require specialized agencies to perform core political leadership because they do not have corresponding political authority and power resources. However, for multilateral organizations with rich expertise in a specialized field, it is the fundamental obligation to provide intellectual support and technical implementation for political decision-making. For example, the political leadership of G20 and the advisory implementation of WHO could converge and form a global action model to counter security threats more actively in global public health. WHO can gather information, propose professional suggestions, and provide a concrete scientific basis for the G20 to put forward global action plans. In this regard, G20 could be continuously elevated from short-term crisis response mechanism to long-term governance mechanism.

Conclusion

International organizations have accrued deep malpractices in managing global affairs. In the current COVID-19 and previous international public health emergencies, there are various difficulties in the operation of international organizations, confining them to take conductive actions, which in turn reducing the effectiveness of problem solving. The world seems to lack a consistent and coherent response in the face of a common enemy. A path of transformation should be explored. Only through constant change can international organizations be reinforced in the new order, otherwise it will be eliminated or replaced. However, we must also be aware that some curtailments are beyond the scope of international organizations and concern the whole international community. The reality of the COVID-19 has put the international community at a crossroads once again. Is it to turn the crisis into an opportunity and make the pandemic a driving force for community building through strengthening all-round cooperation and multilateralism? Or to reject international cooperation, shrink into a corner, and deepen the division of the world? Or to expand the conflict and make the outbreak a pusher of the law of jungle? The rational choice is certainly cooperation. COVID-19 is an acute crisis that not only takes a heavy toll on global public health safety, but also creates global threats to varying degrees in other fields through its spillover effects. Institutional reform needs the solid support of political will and cooperative consensus. Multilateralism is by far the most reasonable approach to global governance, and multilateral cooperation is the most democratic way to combat global threats. Whether global consensus can be reached and cooperation mechanism can be built out of the crisis will not only directly affect the success of anti-pandemic battle, but also have a far-reaching impact on the international relations and world order after the pandemic.

Definition

‘Balance sheet recession’ is an innocuous name for a very big economic event. It represents a particular kind of contraction of a country’s economy – or of the global economy – in which one of the most important laws of ‘financial economics’ is practically disabled; that is the economic law that households and businesses respond to interest rates. In addition, it is a period in which banks impose unusually tight lending criteria with respect to unsecured household and business borrowers.

Households and businesses can be understood as the parties – or participants – of ‘the Economy’; that is, households and businesses are economic parties. There is one other key party – governments – which also plays an important role in the economy. So, the global economy can be thought of as a ‘game’ involving three parties. It is a ‘game’ that – if played well – has no losers; ‘the Economy’ should be understood as a win-win game. Introductory versions of the economic game are two party versions; households are the first party and businesses are the second party.

(We may note that, when considering single nations, the economic game is usually considered to have four parties – foreign households, businesses and governments are commonly lumped together as the fourth party. Generally, all households, taken together, make up the household sector; and voluntary organisations such as clubs can be regarded as households. Businesses taken together constitute the business sector, and all parties foreign constitute the foreign sector. The government sector includes governments at all levels; local, provincial, national. The economic ‘game’, in its purest form, is global; it has no foreign sector, people are people wherever they live.)

Some more definitions. Finance and economics are different – though related – disciplines. ‘Financial economics’ is the part of the discipline of economics which relates to borrowing and saving by the participating parties; so, it relates to the financial deficits and surpluses of households, businesses and governments. Economics is about ‘the Economy’. Financial economics enables us to understand how the distribution of spending can be different from the distribution of income.

Finance – as a distinct discipline – is about the behaviour of financial markets. Thus, it’s about the buying and selling of ‘assets’. Finance is about, as I have called it elsewhere, ‘the Casino’; my preferred term for ‘secondary financial markets’. There are secondary financial markets in shares (equities), bonds (promises, including government bonds), land (real estate), commodities (eg gold and silver), financial derivatives, cryptocurrencies such as ‘bitcoin’, and certain scarce items such as artworks.

We can understand that money circulates in both ‘the Economy’ (the subject of ‘economics’) and ‘the Casino’ (the subject of ‘finance’). Banks are the creators of money – and are thus central to both ‘finance’ and ‘financial economics’.

Under normal circumstances – including normal recessions – with decreasing interest rates, households and businesses respond by borrowing more and saving less; that is, they borrow more from banks and deposit less to banks. And the converse holds; with increasing interest rates, households and businesses respond by borrowing less and saving more. For reasons that are not clear, there is a convention that governments are insensitive to interest rates, under all circumstances. This convention has been sorely tested since the global financial crisis of 2008, but still appears to hold.

(Government-related financial economics is called ‘fiscal policy’; economists can distinguish between ‘autonomous fiscal policy’ and ‘induced fiscal policy’. ‘Induced fiscal policy’ represents government responses to the ‘monetary policy’ actions of the Reserve Bank. The unwritten and unnecessary convention is that all fiscal policy is ‘autonomous’.)

During a balance sheet recession, this normal link between banks and the Economy becomes disabled. Lending to households and business does not increase – as it should – when interest rates decrease. The result is that banks engage less with the Economy, and more with the Casino. The other possibility is that, rather than engaging more with the Casino, banks engage more with governments. This depends critically on governments willingness to pursue an ‘induced fiscal policy’. (There is one other possibility, that the banks practically disengage from both the Economy and the Casino. In the Great Depression – in a number of countries, especially the United States – that meant huge numbers of bank failures through the early stages of that calamity.)

A balance sheet recession happens when a preponderance of otherwise viable businesses (and, commonly, households too) find themselves with so much debt on their books that they become technically insolvent. This situation obliges businesses and households to prioritise the repayment of debt over ongoing investment. These parties become sufficiently debt averse – to both old and new debt – that even very low interest rates cannot persuade them to behave otherwise. Further, banks become reluctant to lend to these businesses and households at usual interest rate margins. It means that money ceases to flow through the Economy via these usual business and household channels. The economy grinds to a halt.

Understanding the Great Depression as a Balance Sheet Recession, and Governments’ Responses

The Great Depression of the 1930s remains “a riddle wrapped in a mystery inside an enigma” to plagiarise Winston Churchill’s description of Russia. While almost everybody has heard of the Great Depression, almost nobody knows what actually happened, what its causes were, or how the world recovered from it. This is not only the case with the general public; it’s also true of academic economists and historians. Economists who know quite a lot about what happened will tend to explain it in terms of the philosophical assumptions they bring to their profession. And many academics – especially American academics – tend to focus on its national dimension, rather than seeing it as a truly global event.

Nevertheless, almost all accounts of the Depression note that mistaken fiscal policies – especially reluctances around government spending – converted what might have been a once in a decade economic event into the economic event of the twentieth century.

Government borrowing was technically more difficult in the early 20th century than it is today; it was a world in which central banking was new. Before the establishment of the Reserve Bank of New Zealand, the New Zealand government had to borrow from the London money market. While the government still borrowed from London and other financial centres in later years, especially at times when exports were insufficient to pay for imports, the presence of the Reserve Bank fundamentally improved the government’s financial autonomy.

The term ‘balance sheet recession’ was only invented in the twentyfirst century – it was not a concept that was understood in the 1930s. Not that it is well understood today. New thinking takes time.

There were other important differences between the Great Depression and the post-1980s economic contractions. The Depression was characterised by quite severe deflation – falling prices – which meant that interest rates close to zero nevertheless represented expensive borrowing. The contrast with more recent events is that borrowing has become very cheap.

The first big new idea that came out of the Great Depression was the ‘debt-deflation’ death spiral. Falling prices would inflate existing debts, and all attempts to pay back money would reinforce the forces that were causing deflation, further inflating existing debts. Thus, the policy imperative in the 1930s was to reverse deflation; to raise prices, to ‘reflate’ the economy. The main policy lever to do this was monetary policy, based on the widespread belief that there was an intimate and predicable relationship between the money supply and the level of prices. It didn’t work. While new monetary reserves can only enter the economy through borrowing, households and businesses were debt-averse; it didn’t matter what the interest rate was.

A secondary monetary policy lever – only able to be applied at the national level – was currency devaluation. The policy did work, though it aggravated problems for countries which didn’t devalue their currencies; it was regarded as a ‘beggar thy neighbour’ policy. New Zealand strongly benefited from two devaluations of the pound – that of the British pound against the American dollar in 1931, and that in 1933 of the New Zealand pound against the British pound.

The policy that did work in all countries – when it was eventually applied – was new government borrowing and spending. The creation of new money had been a necessary but not sufficient pre-condition for economic recovery. The sufficient condition was the mass spending by government of that new money.

There were three major reasons why this required policy was too little and too late, for the world as a whole. First was the gold standard system of fixed exchange rates that applied in the world of the late 1920s and early 1930s; governments of countries that were losing gold were expected to enact pro-depression policies in order to force price deflation. France and the United States in particular behaved as gold hoarders, holding more money at the expense of other countries, and wanting to save rather than spend their gold reserves. A second reason was that price deflation made government borrowing potentially very expensive; just as inflation eroded personal and government debts in the 1970s and 1980s, deflation in the 1930s would aggravate debt.

A third reason was the lack of economic knowledge. The discipline of economics did not have its intellectual revolution until 1936. It was John Maynard Keynes who showed the importance of activist government borrowing during an economic contraction, and allowing debt repayment to take place of its own accord, allowing the recovery to generate the required tax revenue. Applying such counter-cyclical fiscal policy, Budget surpluses in post-recession high growth economies would constrain inflationary pressures that might arise.

Keynes’ findings did not come as a sudden surprise in 1936. There had been plenty of chatter on the subject before that year; indeed Keynes himself wrote much – his collected writings are a massive tome. And Keynes already had a reputation, with several books already well known. People noticed what he wrote. As his thinking developed after 1931, his insights were well available to governments looking for fresh thinking about the unfolding economic crisis.

New Zealand did better than most to get out of the Depression, after a slow – indeed obstinate – start. Once the problematic Minister of Finance (William Downie Stewart Jr.) resigned in opposition to the 1933 devaluation proposal, three important policy decisions happened in the years 1933 to 1937 to bring New Zealand out of the Depression. First was the devaluation of 1933, argued for by new Finance Minister Gordon Coates. The devaluation gave a big boost to the tradable sector; that’s farmers and manufacturers. Second was the creation of the Reserve Bank in 1934 – enabling New Zealand to have sovereign control over its own money supply, especially once it became wholly government-owned in 1936. Third was the willingness of the First Labour Government to use Reserve Bank money to embark on a widespread and successful program of social housing development.

The central problem of the great depression was not just to create new money; the problem was to get that money into circulation into the Economy. That is the problem of the ‘balance sheet recession’, getting money into circulation. Instead, governments trying to balance their budgets by slashing their spending – that is, refusing to borrow to spend – proved to be the principal obstacle to recovery.

Despite the difficulties governments faced, this decision by governments at all levels to retrench – to try to balance their books at a time when households and businesses also were trying to run big surpluses –was the critical factor in making the Great Depression the disaster that it became. In that sense, then, the Depression can be characterised as ‘optional’, given that governments did have another option.

Japan’s 1990s’ Balance Sheet Recession

Japanese are financially conservative people, with a long history of saving and debt averseness. Japanese households were used to lending money to both foreign borrowers and to their own governments.

Japan changed in the late 1980s, following a major global currency realignment (the Plaza Accord) which saw a previously undervalued Yen soar to become substantially overvalued. While this created competitive adversity to Japan’s world-leading manufacturing sector, it also created new opportunities for consumers, and for the development in Japan of ‘the Casino’. A sharemarket bubble began in about 1986, and continued unabated after many other countries’ sharemarkets crashed in 1987. Indeed the 1987 crash created new momentum in Japan, as foreigners sold out of their markets and bought into Japanese financial markets. At the height of the urban property boom, a small area in the centre of Tokyo was reputed to be worth about as much as the total land value of California.

Japanese households and businesses borrowed like crazy to play the enriched Casino; businesses borrowed massively, but to speculate on financial assets, not to expand or modernise their own businesses.

It all fell apart, inevitably. After their 1991 crash, Japanese households and businesses, en masse, found themselves holding huge amounts of debt, and near-worthless financial assets. Economy-wide, the story was much the same – private financial insolvency. All firms scrambled to repay debt; few were willing to take on new debt. Contrary to advice from western financial experts, Japan’s government realised that only it could save the day. The government started to borrow, to offset (and facilitate) household and business repayments. It worked. A shallow but long-lasting period of close to zero growth – a decade and a half of it – became the new normal; the alternative was a catastrophic depression. Not only did Japan save itself by breaking all the rules of conservative public finance, it has continued to retain its position as one of the three biggest economies in the world.

Today, Japan’s 250 percent (of GDP) public debt is its strength, not its weakness. It is financially strong enough to run an Olympic Games in 2021, even without crowds if that turns out to be necessary. Japan is strong today because it never tried to ‘repay’ its 1990s’ public debt. Japan is strong because its public finances are underpinned by creditor households supporting a debtor government. By lending to their government at zero percent interest, Japanese are foregoing some consumption just as they would by paying the money as taxes. However, any particular Japanese savers may withdraw their funds if confronted with an unexpected household situation that requires use of those funds. Japan’s public finance works like an efficient public insurance program.

We also note that, in Japan in the 1990s and early 2000s, businesses continued to grow with minimal business borrowing. Indeed, Japan’s economy continued to export more than it imported despite this lack of traditional business investment. Japan showed the rest of the world – although the rest of the world did not see – that an advanced economy could remain productive and competitive without relying on the traditional capitalist dynamic of household saving and business borrowing. Rather than being utilised by local businesses, Japan’s household savings were absorbed by governments and by foreigners. Interest rates in Japan have been around zero for decades.

The 2008 Global Financial Crisis and ensuing Recession

The years from 2000 to 2008 were characterised in much of the capitalist world by increased household deficits and unanticipated business surpluses; the reverse of the presumed norm. Governments sat back, not realising that it was households rather than businesses which were spending on credit, pumping money into the Economy and into the Casino. Further, businesses were ‘investing’ their saved profits into the Casino, trying to generate speculative returns, much as Japanese businesses were in the late 1980s.

Much as occurred in Japan 17 years earlier, the 2008 crash happened in the United States and elsewhere; massive numbers of businesses and households became technically insolvent. There was no deflation this time, though interest rates – which dropped substantially from 2007 levels – continued to exceed inflation rates. Households and businesses generally became debt averse, though businesses were not indebted to the same extent that their counterparts in Japan had been.

The problems that delayed the recovery from the Great Depression were not there. Exchange rates were flexible – and behaved predictably, in the sense that money returned home from the many exotic destinations it had been sent to. The exchange rates of the bigger and richer economies went up, and the other exchange rates went down. It was cheap for governments to borrow in 2009, because there was minimal deflation to cope with. Debt deflation had not had time to take hold, thanks to a very rapid and global Keynesian response – called the ‘fiscal stimulus’. Policymakers had learned some useful lessons from the Depression.

The bigger story after 2009 turned out to be the second wave of the Global Financial Crisis; mainly the crisis in the European Union (EU). The EU prematurely abandoned its fiscal stimulus, by introducing public ‘austerity’ and ‘fiscal consolidation’. Unlike what happened in Japan, the European governments tried to ‘pay back’ the money. While the consequences were tragic for Southern Europe, the austerity policies also generated much political extremism all over Europe in the 2010s. The consequences of European austerity were offset – fortunately for the capitalist world – by widespread spending and borrowing in the emerging tier of capitalist economies: the likes of India, Russia, Brazil, Turkey, Indonesia, South Africa, and especially China. Most particularly, it was China’s expansionary policies that saved the world from experiencing a balance sheet recession to rival that of the 1930s.

The European Union ‘got away’ with its austerity pro-depressionary policy by running a decade of foreign-sector deficits; that is, other countries borrowed to accommodate Europe’s excess saving. There is no guarantee that the rest of the world will be as accommodating next time; indeed, a lack of ‘rest of the world’ accommodation in the 1930s ensured that there would be a global Great Depression. A part of the accommodation to Europe’s austerity in the 2010s was a substantial amount of private sector (household and business) deficit spending by New Zealanders; and it was that private deficit spending in New Zealand that enabled the New Zealand government to run Budget surpluses after 2015. In financial accounting, ‘deficit’ is NOT a dirty word; it’s simply a negative number.

In the 2010s, New Zealand pursued an austerity-lite approach, benefitting from a rising terms of trade (meaning export revenues grew rapidly on account of higher prices, while import prices fell). By taking advantage of a lucky recovery – a recovery spurred by Chinese and Australian spending – New Zealand missed the opportunity to address its structural inequalities, in favour of pointlessly getting public debt down to 20% of gross domestic product (GDP). Further, New Zealand’s apparent success depended critically on New Zealand households and businesses eager to run deficits – to borrow and spend. As might have been expected, much of that private borrowing was spent in the Casino rather than in the Economy. Hence New Zealand’s inflated real estate market that peaked in 2017, and appears to have taken off again in 2020.

The Balance Sheet of the Reserve Bank of New Zealand

The Reserve Bank of New Zealand (RBNZ, or RB) recently published the following on its website: COVID-19 and the Reserve Bank’s Balance Sheet. (See this chart of the Bank’s balance sheet.)

Where does the money come from for governments to run ongoing expansionary fiscal policies; that is, spending at all levels of government financed by a mix of taxes and borrowing?

The abovementioned chart shows the size of the Reserve Bank’s balance sheet since 2002. Because of double-entry bookkeeping, this is both the assets and the liabilities of the Reserve Bank. The sizes shown represent the base of New Zealand’s money supply. New Zealand’s total money supply is essentially the combined balance sheets of all the country’s banks. The assets of banks are their loans. It means that New Zealand’s money is technically a debt to the banks, and ultimately to the Reserve Bank. The liabilities of banks are their deposits, and their capital (which is their shareholders’ equity). The economic citizens of New Zealand are the shareholders of the Reserve Bank.

When the Reserve Bank increases the size of its balance sheet by adding to both sides, it simultaneously adds to its loans and to its capital. Thus, there is an increase in the amount of ‘money’ that the citizens of New Zealand owe to the citizens of New Zealand.

What then happens is that the Reserve Bank attempts to ‘inject’ that new money into the economy by either (a) lending it to its usual depositors (ie the banks or the government) or (b) by ‘buying bonds’ in the secondary marketplace (ie in the Casino). In the former case (a), on the liabilities side of its balance sheet, the newly created ‘capital’ becomes a ‘deposit’ of the borrower; and that borrower is free to spend or relend that money. In the latter case (b), the Reserve Bank takes over an existing debt (eg a company or government ‘bond’) as an asset, and the money paid to purchase that bond appears in its balance sheet as a deposit liability.

Under normal circumstances the combined balance sheet of the banking system should expand at the rate of ‘nominal economic growth’; that’s the ‘real’ economic growth rate (typically three percent in a year) plus the inflation rate (typically one percent in a year). Thus, over the ten years from 2010 to 2019, we would expect the ‘size’ of the banks’ combined balance sheet to have increased by an average four percent per year. Over a period of decades, we would expect the same average for the Reserve Bank’s balance sheet (ie the balance sheet depicted on the chart referred to); though there tends to be periods where most of that monetary growth is on the commercial banks’ balance sheets, and other (usually shorter) periods when most of the growth is on the Reserve Bank’s balance sheet.

The chart shows basically a flat RB balance sheet from 2002 to 2006, then a catchup from 2006 to 2009, and then another flat period from 2009 to 2019. Finally, the chart shows a substantial jump in 2020. (We also need to note that the chart is somewhat distorting, because it uses an ‘arithmetic’ rather than a ‘logarithmic’ scale of values. See my recent set of Covid19 charts that shows how different charts can look, depending on which scale is chosen. This RB chart understates the changes in the 2000s’ decade – values more than doubled from 2006 to 2009 – and exaggerates the 2020 increase, which represents a doubling of the size of the RB balance sheet.)

What is most important to note here is that the money created and lent in the 2006 to 2009 period has not been ‘paid back’, and never should be. Repayment to the Reserve Bank of that money – in say the late 2010s – would have represented a collapse of the RB balance sheet back to early 2006 levels; an economic disaster.

So, in terms of public finance, what happened in the late 2000s is that the RB purchased lots of commercial and government ‘bonds’ (ie debt assets) from the Casino, and – from 2008 to 2014 – the Government funded its deficits by selling newly issued bonds to the Casino. The Casino acted as a ‘middleman’; an intermediary. The Government borrowed from the Casino, and the Reserve Bank lent to the Casino. The net – and perhaps unnecessarily convoluted – effect was that the Government borrowed new money, indirectly, from the Reserve Bank. The money created by the Reserve Bank went – in part – into circulation into the Economy, through the ‘vector’ of government deficit spending. (The rest of the money created on the Reserve Bank’s balance sheet either entered the Economy through private deficit spending, or entered the Casino as loans used to purchase existing assets such as city real estate.)

In the second half of the 2010s, the Government ran Budget surpluses, meaning it ‘paid back’ some of its debt. It repaid debt to the Casino, but the Casino did not repay the Casino’s creditor, the Reserve Bank. Rather the Casino relent the money that the Government repaid; the Casino relent that money to household and business borrowers, and much of that relent money circulated within the Casino rather than within the Economy.

The net effect, was that the Government paid back money that it did not need to pay back; it repaid money that could have been spent on social housing or on teachers’ salaries or on the healthcare system. And the repaid money did little more than further stimulate the Casino, helping to push up the prices of financial assets.

The repaying of that Government debt represented a case of ‘double jeopardy’; it meant the loss of the many good things that the Government could have spent the money on, and it meant that the prices of financial assets – including residential property – became even more inflated than they otherwise would have become. The flipside of the government’s austerity-lite policy was the housing crisis of 2013 to 2017.

To repeat, the Government debt incurred around the time of the Global Financial Crisis of 2008 was never repaid to its ultimate creditor, the Reserve Bank. Rather it was repaid to the ‘money markets’ (the Casino) who relent it to private borrowers. There is no evidence whatsoever that the private borrowers spent that money in ‘better’ ways than the government could have spent it.

Covid19: The Economy versus the Casino

So, what will become of our present balance-sheet recession, the Covid Global Recession (GCR?)? First, this has the potential to become a global balance sheet recession comparable in severity to the Great Depression. And second, most of the chatter – coming from the media, government spokespeople, mainstream political parties, and most economists who feature in the media – is the capitalist world talking itself into a funk about ‘having to pay the money back’ and ‘intergenerational equity’. Somehow – the confused reasoning goes – future generations will become better off if, in the 2020s, governments opt for ‘depression’ (paying back debt incurred in an emergency) rather than ‘investment’ in people’s lives.

This is frightening chatter, which suggests that we have learned nothing at all from the previous balance sheet recessions which I have cited above. Further, it suggests a naivete about public finance that is substantially worse than that displayed during the Great Depression. In the Great Depression there were real and genuine excuses why governments failed to borrow and spend; at least at that time governments did eventually act, albeit too little and too late.

The Great Depression was a ‘voluntary depression’, in that governments largely chose not to borrow and spend when the only way out of this global event was for governments to borrow and spend.

Most of the chatter that I am hearing tells me that we are heading towards a global environment in which an insolvent private sector – households and businesses – will be desperately trying to run financial surpluses, while governments will be actively trying to minimise their financial deficits. The West cannot reasonably look to China to bail it out this time. This chatter is a recipe for a global depression – an optional or voluntary global depression – that could last many years.

At least in the Great Depression, the Casino had become largely dysfunctional. This time looks like being different. Much of the huge amounts of money being created in the world’s central banks (such as the RBNZ) are getting into the Casino, and circulating there, because governments are far too cautious to utilise the money that the central banks have created. Much of the money that the Government should be injecting into the Economy will instead circulate in the Casino. Further, premature repayment of government debt just pushes even more money into the Casino.

We are already seeing a ‘surprising’ lift in asset prices; house prices in New Zealand, share prices in other countries such as the United States. It’s a result of central banks creating the money that the 2020s’ economy needs, but the governments of the world rebuffing the central banks, forcing money that could do much good into the Casino where it can do much harm. This would be double jeopardy – given a choice of ‘good’ versus ‘harm’ – the governments and the people who elect them seem more intent than ever to choose ‘harm’.

There is one note of optimism, however. In the wake of yesterday’s PREFU – pre-election financial update – today I heard three people mention the term ‘modern monetary theory’ (economists Shamubeel Eaqub and Ganesh Nana; and journalist Corin Dann). (See my Money: Where Does it Come From, Where Does it Go?.) I have never before heard the words ‘modern monetary theory’ on Radio New Zealand. Further, such relatively enlightened economists – though still subject to professional constraints – are starting to admit that public debt is largely money that we owe ourselves, and that the repayment of such debt is not a necessary thing. (We must note that the non-repayment of debt is not the same as debt default; it’s much more that certain types of debt may be perpetually ‘rolled-over’.) These economists are calling for ‘conversations’ about public finance to take place – conversations that I have been trying to facilitate.

Centuries of Government Deficits

In 2009, the New Zealand government was talking about a coming ‘decade of deficits’ as a consequence of the Global Financial Crisis. This was generally interpreted as ‘a bad thing’, even though Japan had showed the rest of the world that government deficits should not have been thought about in this problematic way. Certainly, most of the world’s governments – though not New Zealand’s – got their decade of deficits; an inevitable self-defeating outcome of unusually high levels of financial caution. The 2010s’ decade became a period of high levels of savings, on the part of the world’s households and businesses; and high levels of debt aversion on the part of governments. It is not possible for governments to avoid running deficits when households and businesses both insist on running surpluses.

By definition, for governments – or any other parties – to incur debt means to run financial deficits, and to pay back debt means to run financial surpluses; generally many years of government surpluses. While government surpluses may have been common in a few oil-rich countries, there has probably never been a year – let alone a sequence of years – in which the global government sector has ‘paid back debt’. Government debt is a critical component of the global financial balance sheet. Government debt is a critical component of human ‘civilisation’.

For the coming century to be economically successful, we as a species need to learn to embrace appropriate government financial deficits; as ‘governments doing their job’. While government debt needs to be contractually serviced – it should never be ‘paid back’ if, by so doing, it either has an adverse impact on the circulation of money or helps to fuel the financial Casino, raising the prices of financial assets above their fundamental levels. (The fundamental price of residential land, is the price that renters of that land can reasonably be expected to pay.)

So yes, we should be looking to another century of deficits of the worlds’ governments, as a good thing. Government deficits – despite our unthinking aversion to them – were the central recipe to the advanced state of economic development that took place throughout the world in the twentieth century.

Instead of all our talk of ‘governments paying back the money’ that they must borrow, we should be debating how money should be allocated, and ensuring that we have equitable tax and benefit systems that properly stabilise economic perturbations large and small.

John Maynard Keynes wanted governments to run deficits in difficult times and surpluses in good times. Japan has showed that governments should be running large deficits in bad times, and small deficits in good times. Such deficits do not stifle households and businesses. While government deficits will always have a cyclical aspect, we need to accept government debt as a structural component of sustainable democratic capitalism. What Japan has learned to do with its public finances does work; and it neither leads to unsustainable economic growth nor to the crowding out of genuine private sector economic activity.

Ref. Radio New Zealand interviews mentioned (both 17 Sep 2020):

Economist concerned government’s plan for growth worsens inequality

Treasury forecasts rising unemployment and slow recovery

New National Party leader Todd Muller has presented his party’s vision for New Zealand as it grapples with the economic cost of the Covid-19 pandemic. But Muller’s vision was unsurprisingly National while surprisingly short on economic detail. And, after a week where sordid privacy breaches plagued the party – leaving Muller exposed and scrambling to convince voters that National is credible, stable, honourable and ready to govern – Muller’s campaign vision was supposed to be a circuit-breaker. Instead, it left more questions than answers.

Last week private details of recently returned New Zealanders were leaked to a select grouping of media. The privacy breach was seen as the latest bungle by those charged with protecting New Zealanders against the Covid-19 virus.

National’s leader Muller was quick to apply election year politics to the breach and claim it as another example why voters should oust the Labour-led Government and vote for his National Party at the September elections.

But by Tuesday we learnt things were not as they seemed. After the Government had ordered a judicial inquiry into the matter, stating that the breach could potentially be deemed a criminal issue, a lone National MP put his hand up and admitted to have been the person who sent the private information to the media.

But how did the information come to be in MP Hamish Walker’s possession – information that named Kiwis who were in quarantine, detailed their health status, and indicated the location of their place of isolation?

At that point, National’s Machiavellian politics turned a shade dirty.

It was revealed, Walker was sent the private information from former National Party president Michelle Boag (who was also heading the deputy leader’s re-election campaign team). Boag had apparently received the information as acting manager of a prominent rescue helicopter entity, but, according to Boag, it was received via her personal email account.

By Wednesday, Boag had resigned her acting manager’s role and stood down from the deputy leader’s election campaign team.

Muller insists he knew nothing of Walker and Boag’s tactics and moved to stand his MP down stripping him of his portfolios and hinting that he should be jettisoned from the party referring the matter to the National Party’s board (the board however decided only to remove Walker as a candidate at the next election).

UPDATE: By Friday (July 10, 2020), It was revealed Boag had also provided National MP and health spokesperson, Michael Woodhouse, with private health details of patients. Woodhouse insists that ‘he deleted the information and did not pass any information on to others. He confirmed the information given to him by Boag was not the source of allegations regarding [what was reported as] lax security measures at the New Zealand border‘. (Stuff.co.nz, July 10, 2020)

Stuff reported: ‘Boag said she had sent “several” emails to Woodhouse in June. She described the emails as “comprising notification of a small number of then new Covid19 cases”‘.

Michelle Boag has now resigned her National Party membership.

Woodhouse said Friday he would cooperate fully with the judicial inquiry into the privacy breaches, led by Michael Heron QC.

But Woodhouse is not without blemish either. Earlier this week he told media the leak of patients’ health details was “another serious failing” of the Labour-led Government.

Woodhouse said: “Reports coming in this morning of personal details being leaked which reveals the identity of New Zealand’s current active cases, is yet another serious failing from this incompetent Government.“

“This is unconscionable and unacceptable that those suffering from the incredibly dangerous virus now have to suffer further with their private details being leaked.“

Woodhouse went on to say: “… it’s unfathomable that it couldn’t handle a simple task like this.“

It is ‘unfathomable’ why Woodhouse did not come clean with the knowledge that he himself had received private information of patients’ health details from Michelle Boag.

Woodhouse’s reputation now risks being in tatters. He needs to explain himself further.

What is potentially more damaging are New Zealand Herald revelations that leader Todd Muller knew Woodhouse had received patients’ private health information from Michaelle Boag. This, the Herald reported, Muller knew on Tuesday evening (July 7, 2020).

NZ Herald: A party spokeswoman said today Woodhouse told Muller this on Tuesday night.

‘Muller was specifically asked by reporters “have you checked with Woodhouse, specifically, whether he received that same information from Boag”. “No,” replied Muller and a reporter asked “why not?”

“It’s very clear from our perspective there’s a conversation that’s occurred between Michelle Boag and Hamish Walker. We are confident from what we can see that the issue here relates to Michelle Boag and Hamish Walker.”‘

‘Asked again if he had spoken to Woodhouse and if Boag was a Woodhouse source, Muller said: “No, I don’t really understand where you’re going with this.‘

‘The spokeswoman said Muller didn’t say something yesterday because “we had to look at what that information was and the nature”.

“We needed to assess the information.”‘

The whole deceitful saga leaves one with a sense that National remains bereft of a moral compass, indifferent to legal rights to privacy, manipulative of the public discourse, and prepared to manufacture scandal so as to advance its ambition to retake the Treasury Benches in 2020.

This week’s revelations expose National to a reality that Machiavellianism remains, that factions within National are prepared to operate from the shadows, that the end game justifies the means – to win at all costs.

It is reasonable to realise that Todd Muller was, at best, not respected, at worst, considered irrelevant.

But if Only It Was An Isolated Incident

With Todd Muller becoming leader, standing alongside his Deputy Nikki Kaye, many political observers considered National was sincere in removing dirty politics tactics from its 2020 election toolkit.

But since Todd Muller became leader of the National Party we have seen:

• National’s new leadership team signal its MPs to go for it… that National has a moral obligation to win.
• a culture of ‘politics placed before the public’s interest’ … gotcha politics designed to erode a public’s confidence in National’s opponents, placed ahead of serving the public interest.

Let’s look at a brief recap of previous happenings:

• Around July 17, For at least 20 hours, National held on to information that two women who were Covid positive had travelled from Auckland to Wellington
• National chose to wait so they could use that knowledge in Parliament and deliver a political hit rather than alert health officials, the Government, and the media
• The public’s right to know that information was denied them, for a time.

Clearly, the public deserved to know immediately so those who may have been in contact with the contagious women could self isolate and await to be tested.

But there’s more.

Also we have seen leaks from inside the National Party revealing how its private polling found it had been sinking in popularity after experiencing a short rise since Muller took the leadership. Its leader Todd Muller was disappointed in the leak having occurred. The leak indicates a lack of discipline inside National.

Is this an indisciplined party that is lacking in leadership, out of step with the New Zealand public’s expectations and interests? This whole saga raises the question: Is National fit to govern in 2020?

A Circuit-Breaker – A Vision – But Where’s The Plan?

After the revelations, and after National’s board failed to remove Hamish Walker from the party, Todd Muller needed a circuit-breaker to restore an impression of leadership. National’s Plan to get New Zealand working ought to have provided Muller with exactly that.

At the Christchurch Chamber of Commerce, on Thursday, Todd Muller indicated his Plan had five key pillars:

• Responsible Economic Management
• Delivering Infrastructure
• Reskilling and Retraining our Workforce
• A Greener, Smarter Future
• Building Stronger Communities.

But beyond that, Muller gave little else away. He promised that “over the coming months, and into August, I will be releasing the lion’s share of our Plan in a series of major speeches and engagements.”

He added: “Our vision, our Plan and our direction for New Zealand will place jobs at the centre and deliver the results Kiwis need. We have a track-record that shows we do as we say and get the job done.”

He continued: “Over the next 72 days my team and I will be working hard to share our Plan with you.”

He said: “National believes in: An open and competitive economy;
A broad-based, low-rate tax system; An independent central bank with the primary goal of price stability; The Fiscal Responsibility Act, now part of the Public Finance Act; and A flexible labour market, underpinned since 2000 by good faith.”

Then came a glimpse of the real plan. Muller said: “Under Helen Clark, John Key, Bill English and Jacinda Ardern, New Zealand has spent, in 2020 dollars, $505 billion on social welfare, $302 billion on health, $260 billion on education, and $27 billion on corrections. That is well over a trillion dollars on those four areas alone just since the year 2000, or well over $200,000 for every single person living in New Zealand today.

“When we see more than one in eight New Zealand children still living in material hardship; more than 310,000 Kiwis on a benefit even before Covid-19 (and now up to more than 350,000); more than a million food grants needed last year; and the state house waiting list having more than tripled since Labour was elected, then I don’t think anyone can believe we have achieved the best possible return on that trillion-dollar-plus investment.”

So what is Todd Muller suggesting here? Are we to believe that under his leadership National would embark on an austerity plan that would abandon community-led social investment, education, tertiary and trades-training investment (a raw point of failed social investment of former prime minister John Key’s so called ‘rock star economy’ that was publicly criticised by the OECD)?

Is Todd Muller suggesting a return to small government ideology akin to last century? If so, is that out of step with globalised and developed western economies that have embarked on fiscal stimulus plans more aligned with Keynesian economics than that of Milton Friedman and George Stigler’s Chicago school of economics theories that New Zealand zealously embraced from 1987 through to 2017?

Surely in the post-Covid recovery period economies will require governments to intervene, to commit to broad-based and bold fiscal stimulus, plans that lead toward a rebalancing between export-led recovery and domestic self sufficiency and societal progress?

Is there a role for business to work with government? Yes, certainly, it is a necessity. But in the immediate post-Covid recovery period the business sector will not be ready to pick up the shovel and rebuild to scale on behalf of a government that does not have the willpower to lead the effort.

Muller said on Thursday: “Let me tell you what that means in practice. In 2020/21 and 2021/22, my Government will not be scared of investing more in retraining, if we are confident it will genuinely improve productivity, lower unemployment, increase the tax take, reduce the cost of welfare and improve wellbeing over the following decade.”

Does this mean we would see an overhaul within a period of crisis where Government would constrain stimulus through targeted ‘investment’ to the private sector, relying on the latter to deliver once-government services and social programmes?

Will Todd Muller’s National Party outsource to the private sector its responsibility to deliver social welfare, health, education, corrections services?

Is this what Todd Muller’s key appointment, Matthew Hooton, has been working on since his appointment last month? Hooton’s political commentary is known to many and has contributed greatly to political discourse in New Zealand. Matthew Hooton is known as a proponent of small government, an advocate for the ideologies of right neo-liberal economics who earned his National Party stripes when the ideas of former minister of finance Ruth Richardson was all the rage. Hooton often criticised John Key and former finance minister Bill English for being too moderate and failing to deliver, while popular, reform that would further liberalise New Zealand economic environment.

If Todd Muller is to be regarded as a prime minister in waiting, then eliminating dirty politics from his party is only part of a necessary plan. Convincing a voting public that user-pays and the privatisation of essential social services – welfare, health, education, and corrections – may be truly testing.

But then, a real leader would demonstrate courage alongside convictions. And time, as they say, is not on his side.

The chart above shows how a spending pie-chart may differ for a closed economy, compared to its income chart. For this example, the government sector has a financial deficit (ie a budget deficit) while the household sector has a financial surplus.

In this case the government sector slice is 30% of the spending pie instead of 25%, meaning that the government is spending 20% more than it is earning in taxes. The government deficit represents 5% of the gross domestic product (GDP, which is the total divided pie). The government deficit is financed by a household sector surplus, which as also 5% of GDP. Households spend less than they are entitled to; they save, which is what households normally choose to do. The only matter of interest is whether it is the business sector or the government sector that runs a deficit to match the household surplus. (In this case, the business sector is running a zero balance.)

The chart above differs from last week’s chart, by including a foreign sector. The foreign sector can only be depicted for debtor economies (which includes New Zealand and the United Kingdom, but not the European Union). [Pie charts cannot show negative numbers.]

Here, the foreign sector earns 5% of all income generated in this economy. It is a net figure, the difference between what foreigners earn in this economy, and what locals earn in foreign economies. In this example, the whole divided pie is gross domestic product (GDP), and the part that excludes the foreign sector is gross national income (GNI).

If we choose to call this economy New Zealand Inc, then the fact that GNI is less than GDP defines New Zealand Inc as a debtor economy.

New Zealanders may spend more than GNI; indeed they may spend more than GDP even if GNI is less than GDP. This third measure is gross national expenditure (GNE). If GNE is more than GNI, as it almost always is in New Zealand, then the country can be said to be running an external (or current account) deficit. When a country such as New Zealand is running an external deficit, then the country’s foreign sector is running a financial surplus.

For New Zealand, in each of the last few years, the private sector (households and businesses combined) has run a deficit, the government sector has run a surplus, and the foreign sector has run a surplus. While this is a common pattern for New Zealand, it is uncommon for most other countries. Most countries run a private sector surplus most of the time; which means that they typically run government sector deficits and/or foreign sector deficits.

(What may be confusing is that a foreign sector surplus is reported in a country’s national accounts as a current account deficit. When foreigners are net savers, then our country is a net spender. Our country runs a deficit with respect to the rest of the world, and the rest of the world runs a surplus with respect to our country.)

This chart shows that, from 2015, New Zealand has run private sector deficits (ie negative surpluses), government surpluses and foreign surpluses. This has meant that our governments (especially the central government) have spent less than they earned, and foreigners (on average) have spent less than they earned. Households and/or businesses have spent more than they earned (by taking on more debt, or by spending past savings).

This New Zealand pattern was much more striking in the 2000s’ decade, and briefly reversed for a few years after the global financial crisis (GFC).

While New Zealand, as a nation, has benefited from a foreign surplus in every year shown – indeed from every year since 1974 – it does not mean that New Zealand Inc has had unsustainable debt with respect to other countries. What is does mean is that New Zealanders (private sector) have incurred substantial debts that have never been repaid; nevertheless New Zealand Inc remains solvent because it has had no difficulty in servicing its historic debt, and has had no difficulty in extending its historic debt.

(Note that no 2019 data have been given for New Zealand, because the IMF estimates the 2019 government balance by averaging the known balance to the year ending June 2019 with the forecast balance for the year ended June 2020. The forecast for the present financial year is muddied by the Covid19 pandemic.)

Unlike New Zealand, we can see that the United Kingdom government sector last had a financial surplus in 2001. However, like New Zealand Inc, United Kingdom Inc enjoys the opportunities it has to spend more than it earns. Like New Zealand Inc, United Kingdom Inc is a substantial debtor nation with respect to its foreign sector, and is quite solvent. United Kingdom Inc has faced no requirement to pay back its debt to the rest of the world.

When we look at the Eurozone, which commenced in 1999, we see a very different picture. The private sector has been running surpluses since 2001, and is an important creditor to Eurozone governments. Increasingly, however, the Eurozone private sector has become an important creditor to the rest of its world, including to the private sectors of New Zealand and United Kingdom.

What would the Eurozone private sector do if the private sectors of New Zealand and United Kingdom attempted to repay this debt? It would create all sorts of problems for the Eurozone private sector, which would first try to solve its problem by relending it to New Zealand Inc and United Kingdom Inc. Failing that, it would have to seek out riskier alternative debtors.

The Eurozone is where it is because it is where it wants to be, running foreign sector deficits. If forced to run foreign sector surpluses (ie accept debt repayment), then the Eurozone’s private sector and/or government sector would be forced into running deficits. That’s precisely what the Eurozone people and governments do not want.

If New Zealand and the United Kingdom and the Eurozone are happy to maintain this financial relationship, then there may be no problem to solve. However, there is a problem, and it mainly relates to the Eurozone’s financial relationship with the world’s developing economies.

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.

There will almost certainly be another major financial crisis, just like there will be another big earthquake (or, as the Australians would instead say, another big bushfire). We can do much to improve our monitoring of systemic stresses, our awareness of critical-state dynamics, and our before-and-after mitigation processes. Wilful blindness is not a strategy that works well.

In the pre-World War 1 capitalist era, financial crises happened approximately every ten years. Some were worse than others, and they became increasingly global in reach. Melbourne’s massive financial crisis of 1893 was initiated by the financial failure of the Buenos Aires Water Supply and Drainage Company, and the ensuing bank crisis in London. But the economy of Victoria in general and Melbourne in particular was in a critical state then, and would have suffered a financial collapse in the 1890s regardless of those particular precipitating events.

The ‘Long Depression’ of the 1880s in New Zealand was triggered by the collapse of the City of Glasgow Bank in 1879; a collapse that was largely caused by that bank’s unsupervised exposure to rampant land speculation in Canterbury.

This month’s chart suggests that, while there is more than enough unspent income to fuel a financial crisis, the global financial system is not presently in a critical state. We still have learning time.

The chart shows global financial balances for the private (non-government) and government sectors from 1981 to 2017. As can be seen clearly, the normal state of the world is for the global private sector to run financial surpluses (ie spending less than its total revenue; this is the ‘private urge to save’), which means that the combined governments of the world must run accommodating deficits (ie spending more than their global total revenues). It’s a zero-sum system. The financial balances of all sectors combined add to zero. This means that the private sector persists in striving for substantial surpluses AND governments persistently seek to avoid deficits, then the capitalist economy finds itself in a state of collapse.

Capitalist collapse is avoided by governments accommodating the private urge to save (Japan’s government provides our best example of accommodating deficits), or by us having periodic private debt‑fuelled spending binges (which enable governments to collect more taxes and run surpluses for a while); binges which lead to acute financial crises within the private sector. Or by our addressing and countering the unsustainable accumulation of financial assets, thereby rendering financial crises unnecessary.

The chart shows three of these private-sector ‘binges’, in the mid-late-1980s, in the late 1990s, and in the mid-late 2000s. The chart shows a different pattern in the mid-late 2010s. The banks struggle to get private households and businesses to spend more, despite record-low interest rates.

Following the 2008 global financial crisis (GFC), the private sector responded to its insolvency by paying down large amounts of debt, and by taking on much less new debt. This private sector objective was partially accommodated by unusually high government deficits (‘fiscal stimulus’) – governments taking on new debt, and running down (or halting contributions to) sovereign wealth funds.

This objective and was somewhat thwarted, however; fiscal stimulus in most countries was never more than a partial accommodation to extreme private caution. The thwarting intensified in 2010 through government ‘fiscal consolidation’ programmes, otherwise known as ‘austerity’. The most egregious example of ‘thwarting’ was the European Union (EU) programme to balance government budgets in the Eurozone countries. Fortunately, governments in the emerging and developing economies were able to increase their deficits, helping the government sector to effectively offset private surpluses in the mid‑2010s.

We can get a sense, from the chart, that world private surpluses (especially those in excess of economic growth rates) represent fuel to be consumed during future crises. A dramatic fall in private balances represents the beginning of an acute financial crisis. In the 1987-92 period, the crisis happened in two parts; New Zealand and the United States (and others) mainly experienced the 1987 shock, while Australia, Japan and Scandinavia experienced their financial crises in 1991. In the 1997 financial crisis, east Asia was most affected, while the United States was little affected until late 2000. In 2008 the crisis was global, although Europe descended into its more chronic crisis around 2011.

The chart also tells us that an early-decade pattern of falling private balances has halted; debt-enabled spending looks unlikely to accelerate in 1919 or 1920. The next major crisis may not occur until the 1927-31 period. And a crisis then likely will be different in character to both the 2008-09 GFC, and the Great Depression of the early 1930s. There may be a critical mass of accumulated private surpluses to fuel the crisis of 2029 (the midpoint of 2027-31), a new ‘yuppie’ generation with little memory of the GFC, and an academic establishment no more equipped to anticipate a sudden change of circumstance than there was in 1928 or in 2007.

The chart shows only one form of dichotomous interconnection – that between private individuals/organisations and governments. There are other financial dichotomies that may prove to be equally as important in the twenty-first century, but generally are much harder to get data for. These include households versus businesses (before the GFC, business surpluses were accommodated by household deficits), advanced current account surplus economies versus developing deficit economies (data is plentiful in this case), young versus old (older persons’ financial surpluses are accommodated by younger persons’ deficits), and rich versus poor (richer persons’ [eg world’s wealthiest five percent] surpluses need to be accommodated by the deficits of the remaining 95 percent as well as the deficits of governments. The cessation of any of these present accommodations can be expected to precipitate financial consequences that we are unprepared for. Unknown unknowns; so long as we persist in a bubble of wilful ignorance.

As private surpluses accumulate (the blue columns in the chart), the tension builds. As the tension builds, accommodating sectors cannot (or, unwittingly, choose not) to play their necessary deficit roles. Debtors default, or otherwise stop spending in favour of debt ‘deleverage’. Asset values diminish as sellers of goods, services and assets struggle to find buyers. Deflation sets in. Real interest rates need to be negative to restore a semblance of balance, meaning that interest rates actually should be more negative than inflation rates. (Negative interest rates since 2014 have already substantially eased financial tensions in non‑Eurozone Switzerland, Sweden and Denmark.)

What can we do today to avert a crisis of liberal capitalism in about ten years’ time?

Governments can commit to long-run deficit targets of two‑three percent per annum. (This is contrary to the fiscal accord that all parties currently in the New Zealand Parliament have signed up to.) Younger people can continue to borrow, and purchase goods/services rather than assets, and then turn to bankruptcy as an accommodating mechanism. (The bankruptcies of persons without assets does represent a systemic rebalancing, albeit an unpalatable one.)

Or other new methods of containing the growth of income inequality (with a view to reducing inequality eventually to 1960s’ levels) – methods other than higher wages, which coexist with unsustainable economic growth – should be adopted. Such methods do exist. It is up to each of us to learn about them; to be willing to see. Don’t wait for the politicians, nor the entrenched political left or right. We, in civil society, need to reclaim our public equity.