Last week (The Ponzi financial model and New Zealand’s monetary policy) I described New Zealand’s place and financial strategy within the world’s financial ecosystem; how New Zealand pursues a ponzi financial model, and how that model has played a role in offsetting the ‘mercantilist’ financial strategies of other countries (examples given were Denmark and Netherlands). (See New Zealand chart, noting the persistent inflow of foreign money.) In this kiwi case, New Zealand takes the role of ‘player’, with Denmark and Netherlands taking the ‘investor’ role.

The net effect of this monetary strategy has been East Asia (especially from 1993 to 2009, see Malaysia example) and  Northern Europe (especially this century, see Netherlands example) supplying foreign aid to New Zealand, with the beneficiaries of that ‘aid’ being New Zealand elite consumers. There has been a substantial domestic cost to New Zealand arising from the strategy; a cost which has manifested as substantial entrenched inequality and poverty.

Of course, New Zealand has not been not the only recipient of such unconditional ponzi-style ‘aid’. Other recipients have included Australia, the United Kingdom and the United States. (We may note that Australia is moving away from the ponzi model, though indications are that Canada has adopted it post-2008.) While the United Kingdom and especially the United States have been exceptional cases in other respects, they have both played key roles in balancing the world system. (The United Kingdom is exceptional because it has a financial realm which extends very much beyond its formal borders. These are essentially offshore tax havens. The financial fingerprints of Jersey, Guernsey, Isle of Man, Cayman Islands and Gibraltar almost certainly look more like that of Switzerland than that of the United Kingdom. For the United Kingdom, financial statistics must be treated as incomplete. See my Interesting Financial Fingerprints: Malaysia, Switzerland, United Kingdom, Israel, Evening Report, 30 October 2023.)

Japan

It’s time to see the role of the US, but before that to look at Japan as the truly exceptional country that shows the rest of the world how it could have been managing its public finances.

Japan Incorporated experienced a ‘balance-sheet recession’ through the 1990s, following a few years in the late 1980s and early 1990s of extraordinary exception; a short period of financial speculation run riot – fuelled by a significantly overvalued yen – and in which the lands of the imperial palace in Tokyo were said to be worth more than California.

Japan developed a way of dealing with its first-world financial problems by creating a new financial model, although it must be said that the United States has long deployed aspects of this pro-deficit approach. This new model, which consolidated in Japan as ‘Abenomics’, suits both these countries (the two largest liberal economies in the world), both of whose citizens strongly resist increases in taxation. Abenomics is characterised by what we in the west would call persistently easy monetary and fiscal policy. Japan’s interest rates have been below 1% since 1996. For half the time this century Japan’s interest rate has been zero, and since 2016 Japan’s interest rate has been negative. Japan’s interest rate is still negative. The last time Japan faced a significant financial crisis was 1998, thanks to its position in Asia; Japan weathered the 2008 global financial crisis very well.

Looking at the Japan chart, the dominant feature since 1993 has been the huge private savings being channelled directly into government spending, with the full participation of Japan’s citizens and businesses. Whereas New Zealand actively participates in a globally-oriented ponzi financial model by setting interest rates always high enough to draw in foreign savings, Japan operates a sophisticated and benevolent domestic ponzi model.

In Japan the ‘player’ is the government and the ‘investors’ are the citizens and businesses. Rather than be taxed more by the government, Japanese agree to lend large portions of their unspent incomes to the government, and with wholesale interest rates at zero percent, or less! This is truly astonishing in terms of the usual rhetoric of finance that western populations are subjected to.

It works of course because the Japanese people prefer to lend to their government instead of having that income taxed. It’s win-win. The government gets to spend the money on all sorts of public good systems and projects – as well as on World Cups and Olympic Games – while the money remains available for savers to spend should they experience ‘rainy days’ or should they want to travel or buy a car or buy a house. (It works like a cheque account; while borrowers spend the money, it remains fully available for the account holders to also spend it.)

The downside for Japan is that its cheapness (low cost of living, not low quality of goods) makes foreign travel – and imports – expensive. And then there’s having to put up with the tut-tutting from the west about Japan’s huge government debt. Nevertheless, everybody in the world who can be bothered to observe what financial success looks like understands that Japan’s government can service its debts to its own people. Japan’s government is as far from being bankrupt as any government can be. (In New Zealand’s final political debate before the 14 October election, Prime Minister Hipkins acknowledged Japan’s success by claiming that New Zealand’s economic growth was second only to Japan. Hipkins was not in fact correct; USA had higher growth in mid-2023 than either New Zealand or Japan.)

Japan’s government debt is stabilising at below 300% of GDP. It means that the Japanese government can run substantial budget deficits indefinitely. We should note that, in the 2020s, Japan’s interest rate has remained negative, and that inflation, which maximised in January 2023 at 4.3%, is now 3.0%. Japan’s very cheapness means that it cannot but help running balance of trade surpluses on an ongoing basis. Meaning that Japan becomes an ‘investor’ in New Zealand’s version of the ponzi game.

United States – USA

The final country to mention is United States, which plays both kinds of ponzi game; the New Zealand global version (USA Inc. is the player) and the Japan domestic version (US Treasury is the player). It has to. The United States financial model stabilises a world system destabilised by mercantilist ‘anti-players’ such as the European Union.

It’s just a huge pity that United States government spending is so focussed on war rather than peace. Indeed, the twentieth century wars in Iraq and Afghanistan were entirely funded from foreign savings being channelled into the United States Treasury. It is truly remarkable that the United States has been able to cut taxes while escalating foreign wars.

The United States’ ponzi economy acts as the world’s consumer of last resort; a situation necessitated by the extensive mercantilism elsewhere (especially the European Union), and by virtue of the $US being the world’s reserve currency. And the wars in Iraq and Afghanistan can be understood as ‘last resort consumption’. (We note that military consumption is easily the ‘least-green’ of all kinds of consumption. Fortunately, Japan has been constrained – by others and by itself – from indulging in military consumption. And we may note that in the early 2010s China shared the role, with the United States, of ‘consumer of last resort’. The least green type of production is probably mining; including the mining of crypto-currencies such as Bitcoin.)

The global economy’s woes have been compounded by an aggressive and totally misplaced United States monetary policy; a policy that has sought to induce a global recession by forcing other countries into believing that they also had to raise interest rates aggressively to ‘deal to’ a global ‘cost of living’ problem; a problem that transparently began with the Covid19 pandemic (especially the political ‘mission creep’ which generated a degree of economic paralysis in the world) and came to a head with the US-perpetuated Russia-Ukraine military stalemate. The trifecta of costs was completed by the raising of interest rates in most of the world. The cost-trifecta – the source of the coming stagflation crisis – has been pandemic-related paralysis in 2021 and 2022, war in 2022 and ongoing, and the US-led assault on interest rates from late 2021.

As the global system plays out at present, the United States is trapped in its role as ponzi-player-in-chief. The world will be a better place when the United States plays ponzi in a responsible way, as Japan does. Even better, the United States could be facilitating the intellectual leadership required to lead the world away from mercantilist growth economics. The mercantilist countries prioritise economic growth, and achieving that growth through export surpluses; hence the need for a consumer of last resort. It’s a global economic model that has become completely unsustainable; and which finances the cruel wars which the United States subscribes to.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Today I read this article (David Seymour calls for sweeping changes to make the Reserve Bank more accountable, NZ Herald, 26 October) showing David Seymore’s wish to double-down on New Zealand’s financial model.

The Ponzi financial model operates much more broadly than the fraudulent Ponzi schemes associated the likes of players Bernie Madoff and Charles Ponzi. In particular, the model can and does operate without the fraudulent deception of these renowned schemers. And it can operate on a global scale.

Ponzi finance takes place when ‘investors’ (people wishing to make money from unspent money) advance saved funds to ‘players’ (understood by ‘investors’ as ‘intermediaries’ such as banks or funds managers). Ponzi players then use the funds for their own gratification (gambling or consumption) rather than reinvesting those funds into a venture which would be expected to yield a profit. Instead of servicing the ‘investors’ with genuine earnings, Ponzi players service existing ‘investors’ by borrowing from new ‘investors’. A Ponzi player ‘borrows from Peter to pay Paul’, rather than paying Paul out of income earned. Peter and Paul are example ‘investors’. (In a fraudulent scheme, one could say ‘rob’ instead of ‘borrow’; although even in fraudulent schemes ‘investors’ only actually lose when the scheme unravels.)

(Note that ‘investor’ is one of the most ambiguous words in the English language. In correct economic language, a saver is not an investor; but a true financial intermediary – such as a legitimate bank – is an investor. An investor is a spender, or a direct financer of spending; a purchaser or manufacturer of new assets. A true investor is neither a saver nor a consumer nor a purchaser of existing real or financial assets. Essentially, an investor operates a productive business or acts in a businesslike way, sinking capital and awaiting an eventual return in the form of profit or interest. Investment is ‘giving up something real to create greater future value’. Investment is not the purchase of existing assets in the hope that those assets can be sold in the future at a higher price; such speculative behaviour is gambling, though not all gambling is imprudent. Genuine investment may be called productive gambling, whereas speculative ‘investment’ is unproductive gambling.)

Non-fraudulent Ponzi finance takes place when there is no overt deception. ‘Players’ and ‘investors’ are open about their activities, though there may be degrees of naivete or self-deception on the part of either.

The nation-state Ponzi model

A ‘nation-state actor’ is not the same as a government. A nation-state such as New Zealand, when considered as an economy or as a financial actor, may be called New Zealand Incorporated (NZ Inc. for short). The chart here (Intersectoral financial balances from 1980: New Zealand, from Visualising Countries’ Deficits and Debts, Surpluses and Credits, Evening Report, 29 May 2023) shows, from 1993, the telltale fingerprint of a nation-state ‘player’ adopting the Ponzi financial model as its ‘business model’. New Zealand Inc. is the player in this chart. ‘Peter’ and ‘Paul’ are represented (in green) as the ‘foreign sector’. Paul has always been very happy to ‘invest’ in New Zealand Inc. because Peter keeps supplying the funds which pay Paul. Likewise, Paul pays Peter. There is an ongoing long-term flow of funds from foreign savers to New Zealand consumers as well as to other foreign savers. Much of it is channelled through asset markets; thus the end-consumers are often people who sell their houses or shares to speculative ‘investors’.

The funds from foreign Paul and foreign Peter are channelled into the New Zealand private sector, supporting a mix of private consumption, private speculation, and private investment. The Government gets its cut, indirectly, by taxing the indebted and profligate private sector. In New Zealand, unlike some other nation-state economies, the government is usually able to collect most of the taxes that it levies; so the government is enriched by the process while looking ‘squeaky clean’; the government is taxing debt rather than incurring debt.

While the Ponzi financial model was not fully operable in New Zealand until 1993, it was established in 1985 with the deregulation of the financial sector and the adoption of a monetary policy which ensured that interest rates would be high enough to attract Peter’s and Paul’s money.

We should note that, before 1985, it was also normal for New Zealand to receive a substantial net inflow of foreign funds. But, until then, New Zealand Inc. was following a traditional development model. In that development model, New Zealand – and especially the New Zealand government – was an active borrower, with the foreign sector sufficiently responding to New Zealand’s requests for investment funds. As an active borrower, those pre-1985 debts would be serviced out of incomes generated because of those debts.

In the development financial model, government deficits are a central feature, driving the economic development of the nation-state. In the Ponzi financial model, governments feed off private deficits; while not always in surplus, governments tend to be surplus-seeking. In the development model, governments are the active party. In the Ponzi financial model, the Reserve Bank – the immediate player – sends interest-rate signals to foreign Peter and foreign Paul; Peter and Paul become the rentier ‘investors’, and the banking system of the nation-state is the Ponzi intermediary. In New Zealand at least, the Reserve Bank plays this financial game in part of its own volition; and in part because it is mandated by the government to do so, through the Policy Targets Agreement which David Seymour wishes to modify. The irony is that the Policy Targets Agreement is the ultimate in Government intervention, which is most strongly advocated by those who otherwise claim to be anti-interventionists.

National economies which pursue the Ponzi financial model have overvalued exchange rates for their national currencies; this is the result of the ongoing inflow of foreign funds from the many Peter and Paul ‘investors’. That is the key feature and consequence of setting elevated interest rates, where ‘elevated’ means interest rates sufficiently high to successfully bid for Peter’s and Paul’s spare money.

Excess elite consumption in New Zealand is thus underwritten by foreign ‘investors’, foreign Peter and foreign Paul; indeed, such excess consumption – debt-financed enjoyment – has been funded in that way in New Zealand since 1985, when the floating exchange rate mechanism was introduced. New Zealand has become one economy in which the foreign-exchange market is dominated by ‘investors’ and ‘players’ rather than by exporters and importers. Not in the top-fifty economies in the world based on gross domestic product (GDP), New Zealand Incorporated is among the top 15 in foreign-exchange transactions.

While private sector deficits in New Zealand did not become prominent until 1993, we may see from Governments run financial deficits; it’s their role to do so (Evening Report, 17 Oct) that private sector surpluses are the global norm, and when global private sector balances approach zero then trans-national financial crises are the result. New Zealand only shows private sector surpluses during financial crises, and even then these private surpluses are smaller than in most other countries.

To see the converse financial model, we may note these two countries: Netherlands and Denmark. These countries, with their financial signatures opposite to New Zealand’s, in slightly different ways pursue the ‘mercantilist financial model’, which relies on an undervalued exchange rate. (Noting that a central feature of the Ponzi nation-state financial model is an overvalued exchange rate.) Netherlands, if you like, is Paul. And Denmark is Peter. Whereas New Zealand’s consumers – especially its elite consumers – overconsume, Netherlands’ and Denmark’s underconsume. Netherlands’ Paul and Denmark’s Peter transfer material enjoyment to New Zealand consumers. In general, in the Ponzi financial model, ‘investors’ transfer consumption enjoyment to ‘players’.

Netherlands is a small nation-state within the Eurozone of the European Union. And Denmark, though in the European Union, has its own currency and banking system, untied to the European Central Bank. Denmark Inc. is the closest to being the antithesis to New Zealand Inc. As such, it became the best-known country in the world for its negative interest rates, which its Reserve Bank operated from 2012 to 2022. (Refer Reuters 22 July 2022, Denmark’s decade-long experiment with negative rates seen ending soon.)

The Netherlands’ case is more complex; it is linked to an unstable (and perhaps unique) example of the Ponzi financial game; the example which operated within the Eurozone during the first decade of this century. In that 2000s’ scenario, inflation in the southern European Union countries created an effective currency overvaluation there, and an effective currency undervaluation in the north of the Eurozone. Netherlands became the northern exemplar, while Greece was the southern exemplar. The dynamic in this case was the ‘investors’ in Eurozone north whereas the south was the ‘player’. In this case the game crashed in the early 2010s, and now the Eurozone as a whole is playing the role of ‘investor’ in the same global Ponzi game which New Zealand and Denmark (and others) have been playing since the 1990s.

Why do I call this game a ‘transfer’ from ‘investors’ to ‘players’? If we look back over the decades, we see a direct subsidisation of ‘player’ living standards by ‘investors’. Under conventional financial principles, this would be called a player ‘liability’ rather than a ‘transfer’. However, the issue is that players’ debt to income ratios have not been increasing, thanks to a mix of economic growth and inflation. (This economic growth is largely despite the engagement with Peter and Paul, not because of their ‘investment’ in us.) New Zealand as a player has never had to repay its debts to its Peter and Paul ‘investors’. NZ Inc. services these debts with ease, by enlarging these debts. This debt servicing becomes even easier when global inflation diminishes the accrued debts as well as the interest payable. Nevertheless, New Zealand continues to play the Ponzi game; in order to keep its exchange rate overvalued, New Zealand must pay Paul by borrowing more from Peter than it is paying to Paul. The player pays its interest (and any repayments) from newly borrowed funds.

Iceland’s banks played the same Ponzi game in the mid-2000s. It got severely burned by the 2008 Global Financial Crisis. But, after what amounted to a painless bankruptcy, Iceland Inc. recovered soon enough.

What applied in the past will not necessarily apply in the future. Global deflation, if that happens in the future, would increase the debt-to-GDP ratio of NZ Inc. But global stagflation looks to be a much more likely bet for much of the next twenty years. New Zealand’s accumulated debts to date would then largely disappear into the ether of financial history. New yet-to-be-incurred debts would probably enjoy the same fate. Nevertheless, New Zealand’s financial game will end when there are no longer willing Peters to facilitate New Zealand’s servicing of Paul. Paul might even ask for repayment in full. New Zealand’s exchange rate would then fall, and Paul’s payout in New Zealand dollars would convert to a lesser amount of Euros. The only substantial consequence for New Zealand would be that the Peters and Pauls of this world would no longer see New Zealand as exceptional; would no longer see New Zealand as a player who would pay them higher ‘risk-free’ returns than other players.

Is it a Problem?

This state of affairs is not (and has not been) a problem for any of the participants, because they are all ‘consenting adults’, and all parties have been rewarded so far. Indeed as noted in my Governments run financial deficits; it’s their role to do so (Evening Report, 17 Oct), this is a case where two wrongs do seem to make a right. Two forms of destabilising financial behaviour – mercantilist and Ponzi – offset each other. So long as the Danes and the Dutch keep playing their game, they (taken together) do not want to be paid out simultaneously; they want to keep playing. Repayment for them would mean that their incorporated countries, long-used to private sector surpluses, having to enjoy deficits; they would have to spend more than they earn, something they are not used to and have never been comfortable with.

Looking back over the last 30 years, New Zealanders have benefitted; and Dutch and Danes have lost, though they would have lost by more if they had ‘invested’ elsewhere at lower interest rates. They have been the givers, and New Zealanders have been the takers; and have been the takers without any form of systemic financial default.

However, this Ponzi financial model is a past and present problem in that it has substantial adverse distributional implications for New Zealand (high domestic wealth and income inequality); and, distributional implications for Netherlands and Denmark too (less domestic inequality than they otherwise would have had). In this sense, it is Netherlands and Denmark – not New Zealand – who become the winners of the game.

The differences, domestically, are linked to the interest rates. New Zealand’s financial model depends on setting interest rates above the norm for economically advanced nation-states. Netherlands and Denmark’s mercantilist model depends on setting interest rates below that norm. High interest rates create inequality; and perpetuate cost-of-living crises; crises which are ameliorated by the overvalued exchange rate keeping elite consumption cheap. Low interest rates in Netherlands and Denmark diminish inequality, reduce the costs of housing and other basic needs, and, through their undervalued exchange rates, raise the prices of elite consumables.

Summary

The New Zealand economy has worked according to a simple Ponzi model since 1985. The model relies to a degree on New Zealand exceptionalism which works by creating the perception in world financial markets that New Zealand is a sure bet: both ‘safe’ and providing ‘investors’ with relatively high returns. The model relies on the government’s anti-inflation mandate to justify the higher domestic interest rates required.

Interest rates in New Zealand are set to ensure an inflow of foreign savings which stimulates (while indebting) New Zealand’s private sector, and which sees significant amounts of that credit pass through the private sector into government coffers.

New Zealand’s Ponzi financial model is stable so long as New Zealand retains its exceptional status in foreign perception. Is New Zealand’s Ponzi financial model stabilising? Yes, given the mercantilist games played elsewhere in the global financial ecosystem. How will the model fare in the next Great Depression? Possibly no worse than Iceland fared in the 2008 Global Financial Crisis.

Should New Zealand Incorporated shift to another financial model? Yes, because ultimately two wrongs do not make a right. And because this model underpins the increasingly grotesque inequality we see in Aotearoa New Zealand. And because the two extranational Ponzi games which we are familiar with from the late 2000s, that played by Iceland’s banks and that played by the Southern Eurozone (including Ireland who got away with it; see Economic Growth, Ireland compared to Australasia, Evening Report, 12 Oct 2023), both crashed and burned soon enough.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

The topic of financial debt is one of the hardest for humans to get their heads around. The normal understanding of a debt is a sacrifice made by one party (the owner of the debt) in favour of another party (the ower) which will be remedied some time in the future by the ower (ie debtor) making a sacrifice – repayment – in favour of the owner (ie creditor).

In the financial world it’s not so simple, in particular because the owners of debt (ie creditors) tend to see themselves as making a financial investment; a transaction which they do not regard as a sacrifice (or much of a sacrifice). What they seek is a reward in the form of interest, or as financial security; this latter reward is akin to insurance, money in the bank stashed away for a rainy day and most likely accruing interest in the meantime. Generally then, creditors to not want to be ‘paid back’, but they do want their ‘investments’ to be ‘serviced’. And while most debts have a ‘maturity date’, the normal desired result on the part of both debtor and creditor is to have maturing debts ‘rolled over’.

The first three charts show the debt context for United States, New Zealand and Australia from 1980 to 2022. They show changing surpluses (above the zero line) and deficits (below the zero line). These three countries are ‘debtor countries’ – ie with respect to other countries – although of these only United States has a substantial government debt. (Most people – and especially most mainstream media – confuse a country’s indebtedness with that country’s government debt.)

In the United States chart above, the green surplus plots indicate that, every year from 1982, the United States has incurred debts to the rest of the world. Hence we can say without equivocation that United States is a debtor country. Each year since 1982 the United States has spent more than it earned, and the rest of the world has spent less than it earned.

The other dominant feature of the United States chart is that in every year except 1998-2000, governments in the United States have run deficits, so have increased their debts. So the size of United States government debt today is at a record high, having increased just about every year. Many would regard this huge ‘rolled-over’ government debt as a sign of economic weakness, but in fact it’s the opposite. Further, this debt – this annual spending excess on the part of the United States government sector – is the single most important driver of growth of the world economy. It represents demand for American and other countries’ goods and services.

In the USA, the private sector – mainly businesses and households – is in most years a saving (ie non-spending) sector; although the private sector part of the chart masks some important detail. Since about 2000, businesses have been net savers most years while households have been net debtors in many years, especially in the early years of the century. This is the opposite of what most economists believe should be happening; the traditional economic model of finance shows growth as being driven by households lending their savings to businesses, typically through intermediaries such as banks.

We see sharp behaviour changes in 2008/09, the Global Financial Crisis; and 2020, the Covid19 pandemic. In 2008 it was largely the private sector that forced the change, whereas in 2020 it was mainly the government sector that had to borrow and spend on a massive scale both to fund public health measures and to compensate for an expected dramatic decrease in private spending.

The United States economy is very much defined by the process of government debt being both rolled-over and extended. Problems come when there emerge political impediments to this process. The politics around the United States debt ceiling represent the threat of such impediment.

Before going on to New Zealand and Australia, we need to note two rules that represent laws of arithmetic. The first of these is that the total net spending of the spenders must exactly equal the total non-spending of the non-spenders. We may think of, since 2008, that American governments are buyers while private Americans and foreigners are sellers. The arithmetic constraint is that the total amount of sales must exactly equal the total amount of purchases.

What this means is that if any sector successfully changes its financial behaviour, then at least one other sector must also change its behaviour. So, in 2008/09, the increase in private saving – mostly in the form of private debt repayment – could only have been achieved if the American governments spent more or if the rest of the world saved less. American government obliged by creating the money it needed to spend more.

The other arithmetic constraint is that the world as a whole can neither run a surplus nor a deficit. So if the ‘rest of the world’ changes its behaviour towards the United States, then it must also change its behaviour with respect to at least one other country. (The green plots of one country’s chart connect to the plots for other countries.)

The New Zealand chart above shows that for New Zealand also – indeed since 1982 – the rest of the world has run financial surpluses every year. That makes New Zealand, unequivocally, a debtor nation. However the big difference, at least from 1991, is that New Zealand has a debtor private sector rather than a debtor government. Indeed the driving force of New Zealand Incorporated is private sector debt; business and household debt.

New Zealand is in a less privileged position than the United States. The United States dollar is the world’s reserve currency, so savers in the world incline to save by lending to the United States. It also means that the United States domestic economy is the world’s consumer of last resort. (That’s how the United States has been able to fund its wars.)

New Zealand’s chart structure as indebted private spenders is driven by three factors. First is the general lack of fear of debt by New Zealander businesses and households; at least a lack of debt-fear compared to the citizenry of other countries. The second is a monetary policy which ensures that interest rates are high enough to attract foreign savings; indeed the understated subtext of monetary policy in New Zealand is that, in order to keep the nation going as per the above chart, the New Zealand dollar must be kept in a perpetual state of overvaluation. The third factor is a New Zealand exceptionalism which is generally subscribed to by foreigners; indeed former prime minister Jacinda Ardern did much to foster that marketing of New Zealand as an exceptional country. Thus New Zealand has a low international ‘risk premium’ on its interest rate settings; South American countries otherwise like New Zealand would need much higher interest rates to get away with a chart like the New Zealand chart above.

Interestingly, last week’s most recent monetary policy statement was seen by the financial world as ‘dovish’, meaning that interest rates in the next few years are now expected to be lower than they were previously expected to be. The result in the last few days was a significant fall in the value of the New Zealand dollar. If the financial surpluses of the rest of the world with respect to New Zealand fall – the green plots on the chart – then the private sector deficits will also fall, and New Zealand will move into recession unless the government commits to much bigger fiscal deficits.

The Australian chart is historically much like New Zealand’s. Except, from 2020, Australia is moving away from dependence on foreign credit; hence it is keeping interest rates much lower than New Zealand’s, enough to achieve a fine balance with the rest of the world. Also, Australia is looking to be more relaxed about future government deficits than New Zealand is.

We should also note that the 2019 data are misleading for both Australia and New Zealand. This is because annual data in these countries is reported internationally on a June year basis. Thus, to convert to a December year, the IMF (for example) averages the year to June 2019 with the year to June 2020. Hence, the Covid19 impact has found its way into the 2019 data for New Zealand and Australia.

I include four other countries to show how different much of Asia and Europe is from United States, Australia and New Zealand.

In these charts the ‘rest of the world’ is a net spender, meaning that these four countries export – each year – more than they import. We may note that, in the United States chart, the rest-of-the-world non-spending was mainly China. This role of China has much diminished in the last ten years. Now it is the European Union which is acting as the biggest net creditor. Netherlands best represents the European Union’s ‘exporter’ financial strategy, because it is in the Eurozone. Denmark on the other hand, while in the European Union, has its own currency which it can manipulate (through lower interest rates) in order to achieve an ongoing status of having a slightly undervalued currency (ie the exact opposite of New Zealand’s monetary policy subtext).

Note that Japan has easily the most accumulated government debt of any country in the world. It’s a strength, not a weakness. (Indeed Japan’s government only ran fiscal surpluses ahead of its very severe financial crisis around 1990.) At present Japan has an OCR equivalent interest rate of minus 0.10 percent and an inflation rate of 3.5 percent. So much for needing to have high interest rates to suppress inflation. Japan’s secret is that it is at minimal risk from foreign creditors changing their perception of Japan’s creditworthiness. Denmark, also at minimal risk, has an interest rate of 2.85 percent and annual inflation at 5.5 percent.

Notes

Since the Eurozone financial crisis of 2012, the European Union has pursued a financial policy of running current account surpluses and balanced budgets. Thus, the Euro interest rate has been kept lower than other major economies, keeping the Euro slightly undervalued. A slight undervaluation for the Eurozone as a whole translates as a very substantial undervaluation for two countries in particular: Germany and Netherlands. That’s why the chart above for Netherlands shows that the rest of the world has large deficits with respect to Netherlands, and why the Netherland’s domestic economy runs persistent financial surpluses. Netherlands is a chronic non-spender.

And note that, in the long-run the surplus countries (eg European Union, Japan, China) subsidise the deficit countries (eg United States, New Zealand). The higher the rates of global economic growth and global inflation, the higher the rate of subsidisation. New Zealand – in particular, the New Zealand private sector – is one of the great winners of this financial subsidisation game.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

The first of the above charts shows excess seasonal deaths in the United Kingdom as winter approaches. While the huge mortality peaks of the pandemic in Britain are long past, we do see significant excess mortality in the United Kingdom since April. And October 2022 excess mortality rates are higher than those of 2020 and 2021. The situation in Netherlands is similar.

The story in Germany is similar, since June 2022. While the recent unseasonal mortality peak – due to Covid19 if reports are accurate – is now waning, it seems likely that Germany will face another mortality peak comparable with its influenza peak of 2016/17. In Germany, none of its Covid waves had as much peak excess mortality as the influenza peak of February/March 2018.

The data is not as up-to-date in the following three countries.

For New Zealand, we see the Covid19 deaths as a period of rising seasonal excess from February to July this year. Then there was a sharp drop-off, meaning that from August New Zealand experienced just its normal late-winter seasonal mortality. While some of this was due to Covid19, it was offset by lower-than-expected deaths from other seasonal illnesses. My hunch is that New Zealand will see a summer Covid19 mortality peak; not as high as the July peak, but unambiguously Covid19.

The other New Zealand story is the unexplained winter mortality peak of 2021. All the New Zealand public knows about this is that it was neither Covid19 nor Influenza. It might have been due in part to RSV, which hospitalised many young children in 2021. In the United States at present, we are getting reports (eg from ABC News this week) of a “tripledemic”, which includes a nasty ‘flu’ and an RSV outbreak that is hospitalising older Americans as well as children.

Finland is one country in Europe which New Zealand likes to compare itself to. Finland avoided the dramatic Covid19 peaks experienced by United Kingdom and Netherlands. But it has had worryingly high excess mortality since June 2021, and continues to do so.

Sweden, unlike Finland, had two big peaks of Covid19 mortality in 2020. Since then, Sweden has generally looked much better than all other European countries. Nevertheless, Sweden did have a problem, presumably a Covid19 problem, from June to October 2022. Though not as bad as Finland.

Overall, the pattern seems to be that populations are becoming more vulnerable to respiratory illnesses. If people who have previously had Covid19 are dying more, then damage already done by the SARS-Cov2 virus is likely to be the main culprit. If people who did not get Covid19 previously are facing a higher risk of death from respiratory illness, then the main problem is likely to be compromised general immunity arising from reduced general community contact with these types of viruses.

The post-covid mortality problem is slightly worse than it appears, especially if we consider United Kingdom and Netherlands, both countries with high early death tolls from Covid19. In these countries, many of the people most vulnerable to Covid19 have already died. So the denominator populations are, disproportionately, covid survivors (meaning either they had it and recovered, or they avoided it). Typically, after a demographically-significant epidemic, subsequent death rates should be below the historical average.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.