Walking the path?

This is a good review by Michael Reddell on my co-authored report. As he pointed out, we agree with the Goodhart/Pradhan hypothesis on the demographic implications on the global financial system.

croaking cassandra

At 11am the New Zealand Initiative released their latest report, by Bryce Wilkinson and Leonard Hong, under the title “Walking the Path to the Next Financial Crisis”. It comes complete with a Foreword from former Reserve Bank chief economist (and former Board chair) Arthur Grimes, under the title “A short walk?”, foretelling doom and repeating his recent attacks on the Reserve Bank’s conduct of monetary policy over the last 20 months, ending with the ominous – and printed in bold – declaration “This time is not different”.

The Initiative was kind enough to send me an embargoed copy yesterday. Perhaps the first thing that rather surprised me – in a document that is really quite critical of both monetary and fiscal policy and aspects of the way the Bank does other things – is that the acknowledgements include thanks to a Reserve Bank MPC member (Bob Buckle) for “valuable feedback…

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The next financial crisis?

Both the global financial crisis (GFC) of 2007-2008 and the Covid-19 pandemic caused disruptions to the world economy.

During the GFC, stock markets plummeted, and millions of people became unemployed. Business and bank failures resulted in financial pain.

Covid-19 did not cause as much economic destruction as experts predicted. So far, at least.

During this recession, bankruptcies declined during the pandemic, while prices of assets such as cryptocurrencies, stocks, and houses reached record levels. The net worth of US households increased by USD$26 trillion in 2020.

These developments are extraordinary and unusual. Usually, recessions mean severe losses rather than wealth gains. Are our current financial circumstances sustainable?

Our new report Walking the path to the next global financial crisis explains how skyrocketing public debt and monetary policy easing threaten global financial stability.

In the wake of the GFC, government bailouts of financial institutions ratcheted up public debt ratios dramatically. That was not reversed before Covid struck.

Governments and central banks in developed economies now face tough choices regarding interest rates and debt.

Raising interest rates or ending quantitative easing could destabilise asset markets and the economy. Governments, meanwhile, struggle to wind down stimulus spending and fear higher interest payments on debt.

By printing money and maintaining low-interest rates, it also fuels consumer price inflation. In New Zealand, consumer price inflation hit 4.9% – the highest level in over a decade. Inflation in the US and the EU is also approaching 6%.

The authorities are not showing a determination to return settings to more normal levels before the next economic shock occurs. They have led investors to believe that the government will underwrite high asset prices such as cryptocurrencies, stocks and housing.

It is now common to hear terms like “too big to fail” and “whatever it takes” in financial market jargon. Such beliefs are dangerous for financial stability.

For the government, it is prudent to repair the roof while the sun is still shining. Financial support packages were necessary during Covid-19. But the government should have a credible plan for reducing net debt to more sustainable levels once the pandemic is over.

The financial well-being of citizens is at greater risk when governments are less financially prudent.

As a small, globally integrated economy, New Zealand cannot prevent the next financial crisis.

We do not know when the next financial crisis will hit. But we can prepare for it when it does.

The Fragility of the Global Financial System

We’re on a slope where monetary policy has become increasingly ineffective in promoting real economic growth. Every crisis was met with monetary easing that caused debt and other imbalances to accumulate over time, and that caused the next crisis to be bigger than the previous one. 

William White, Former Chief Economist of The Bank of International Settlements

Cracks on the Wall in 2021

A few weeks ago, US Secretary of Treasury Janet Yellen announced that the US government is heading towards default if Congress does not lift its ‘debt ceiling’. As we all know from economic history, the default of the United States would be a catastrophic ‘financial Armageddon’. With the US being the largest economy in the world, this is alarming news.

On the other side of the world, China’s second largest property company, Evergrande is facing a debt crisis. The default of Evergrande may have potential spillovers with the residential market being worth 29% of China’s GDP (Rogoff and Yang, 2020). Excess leverage of the Chinese corporate sector does not spell financial confidence. Some are claiming that this is potentially a Chinese ‘Lehman Brother’ bubble bound to pop like the 2007-08 global financial crisis (GFC).

In Europe, since the advent of Covid-19, the European Central Bank bought virtually all the government bonds (quantitative easing) of European countries like Italy and kept its interest rates at zero percent. No private investor is willing to buy government bonds at this stage. The only market players in this area are central banks.

Something strange is happening across the world economy. We are witnessing imminent cracks in the global financial system. It’s difficult to predict what may occur in the next few months or years, but one thing is clear – the global economy is extremely fragile. The net worth of many individuals and households are bound to crash sooner or later.

Populism is the true legacy of the global financial crisis | Financial Times
There are strong correlations between populism (both left and right wing) and the 2007-08 global financial crisis. (By Ingram Pinn for The Financial Times).


Virtually everyone understands that getting into excess debt leads to trouble. Whenever someone sees a ‘red’ balance in their bank accounts, they panic and try to do everything they can to either lower their deficits or pay back the debt. Financial circumstances matter to people. Saving before spending is the common wisdom. This logic applies to governments too. Except they have the ‘printing press’ with government-controlled (or owned) central banks to fill their coffers (as lender of last resort), on top of tax revenue.

Whilst it may be true to claim that governments are different to individuals and households, its economic decisions have significant consequences on our livelihoods.

It’s been a year since the Covid-19 pandemic began. In contrast to last year’s 3% economic contraction, the International Monetary Fund (IMF) projects that the world will face positive economic growth of 6% for 2021 (IMF, 2021). It seems that high vaccination rates are allowing cities and regions to get out of lockdowns. The United States, the United Kingdom, the European Union and other parts of the world are opening up to the rest of the world. In hindsight, financial circumstances appear better than 2020.

However, there are serious questions as to whether this will be the case in the medium term. In response to the Covid-19 pandemic, many governments across the developed world have accumulated debt levels well-beyond their annual economic output (Gross Domestic Product – the value of every single thing sold on every single shelf around NZ and the value of every single person who worked for a whole year) and the net worth of these governments are heavily in the negative (considering the assets and liabilities of governments).

Table 1: Net Worth of Governments

United Kingdom-141
United States-69
South Korea41
New Zealand46
As of 2016, governments were already under in the heavy negatives (IMF, 2018)

This is an unprecedented level of debt during peacetime. Instead of fiscal surpluses, we have so far witnessed the exact opposite from governments. Unfortunately prudence is not a popular term for government officials. Low interest rates from central banks induced more governments to borrow more money. They decided to get the money now instead of the future. Instant gratification took precedent over delayed gratification.

In addition, central banks across developed economies printed trillions of dollars out of nothing to stimulate the world economy away from the recession. They also lowered its interest rates to zero-bound levels. In essence, central banks have made borrowing extremely cheap for everyone, including governments. But the such low interest rate levels are unprecedented.

Spending has become easier. Saving money is not rewarded. Inflation undermines the real value of the dollars in your bank account. This forced individuals to speculate in the stock market or the housing market for a decent return. Unproductive zombie firms have been propped up without falling, forcefully maintaining low unemployment levels without ‘creative destruction’ (Banerjee and Hofmann, 2018, 2020)

But what happens if these markets face downturns again later? Everyone may lose everything. Can they react in a similar manner to the GFC of 2008 or Covid-19? Are bailouts from governments even feasible? I’m not entirely sure.

This is why governments and central bank policies matter to all of us. This essay will explore the few key variables that culminated into the current state of financial affairs. The moral hazard problem; the public debt precedent set by the 2007-08 GFC; the doubling down of debt with the responses to Covid-19 and finally the potential long-term ramifications of these responses.

In times of uncertainty, policymakers pursued these policies for correct short-term reasons, but the decisions have created unintended consequences for the future. Central Banks cannot raise interest rates, nor can they suck the printed money out of the system for fears of creating a worse recession. They are now stuck at a corner by kicking the ‘recession’ can to the future. In the words of former Federal Reserve economist Bill Dudley, central banks are “running out of fire power” (Dudley, 2020).

The decisions in response to the pandemic were understandable. In the face of uncertainty, it is entirely rational to have pumped money into the economy, and to have spent billions on the wage subsidy and other fiscal programmes across the developed world – including New Zealand.

But the net consequences is that the financial system does not look healthy or sustainable. In contrast to optimistic scenarios, the reality is that the world is at a crisis point.

Overall, the decisions by governments and central banks have created a financial system that is chugging along entirely on the “excessive build-up of debt” (White, 2021). This is unsustainable and a form of a financial crisis will loom the world soon. It is uncertain how this next crisis will occur, but economic history tells us that risk is always present (Reinhart and Rogoff, 2009).

We will explore the reasons why that is the case. The origins of the problem started with the end of the stagflation period under Paul Volcker.

The Rise of Moral Hazard

The only way to contain the economic damage of a financial fire is to put it out, even though it’s almost impossible to do that without helping some of the people who caused it.

Ben Bernanke, Henry Paulson and Timothy Geithner, on their policy responses to the GFC

Moral hazard is a common economic term used to define human behaviour when people get incentivised to take more risks for greater profit at the expense of the other party. Another term for this is the ‘principal-agent problem’. For example, if I have health insurance I have the incentives to be more careless with my health, assuming the insurance company will bail me out when I need heart surgery based on my heart attack. It’s the problem of taking more risk when you are not as personably liable.

On similar grounds, beginning with the Federal Reserve Chairman Alan Greenspan, central banks intervened in the economy whenever there was a downturn in the stock market. In contrast to health insurance where there is a risk premium demanded by these companies, what Greenspan did was essentially bail out investors and financiers for free repeatedly. Under Greenspan, the Federal Reserve intervened by lowering the Effective Federal Funds rate during the 1987 stock market crash, the 1994 Mexican peso crisis, the 1997 Asian Financial Crisis, the collapse of Long Term Capital Management and the dotcom bubble in 2000 (Rudd, 2009). By easing monetary conditions whenever there was a downturn, he propped up the stock market and economic activity. Essentially, the Fed was providing free insurance to investors. During his reign between 1987 and 2006, he was world renowned for presiding over the ‘Great Moderation’ period of moderate economic growth, low unemployment, low inflation and ‘managing’ the global economy well.

But if you continue bailing out the people that fail, they are more likely to make riskier decisions, assuming a massive profit by taking that risk. Why wouldn’t they!? The Fed had their backs. The higher the S&P 500 went, the more riskier investments they made. We see this in the growth of new financial products in the likes of subprime mortgages market (Mortgages lent to people that do not have the collateral, capital or employment to buy homes, but loaned out on the basis of higher risk. These were sliced and diced into non-risky assets into the form of Collaterized Debt Obligations) and credit default swaps (financial instruments purchased on the assumption that other parties will fill for bankruptcy, which is essentially a bet) during this era. This was a timebomb in the residential sector that was bound to fall, but for the medium term, as long as house prices continue to go up, things looked rosy. Then the global financial crisis happened beginning in 2007.

The Road to High Government Debt Levels: GFC 2007-08

New Zealanders might recall the tumultuous period during the 2007-08 GFC. The fall of Lehman Brothers and other financial institutions across the stock market left investors in panic mode. The financial ‘cancer’ of subprime mortgages and CDOs spread to the entire global financial system. Banks such as Northern Rock in England faced bailouts from the British government and the Bank of England. With the help of the Federal Reserve, the United States had to spend USD$1.5 trillion in bailouts and tax cuts to stimulate the economy and stir away from the global recession. It was a transfer of a banking crisis into a public debt crisis.

Alongside the Federal Reserve in the United States, other central banks – such as the ECB, the Bank of England and the Bank of Japan – begun the process of what economists call quantitative easing (the printing of money) and reducing their interest rates to low record levels. This was to save the economy from falling into further recession.

Millions of people lost their homes, life savings and their livelihoods. Many people became unemployed and lost jobs – some even permanently became redundant. It was an extremely unpleasant sight at the time. Alan Greenspan’s reputation had tarnished completely.

It affected the New Zealand economy as well. NZ unemployment jumped from 3.6% in 2007 to 6.1% by 2010. As a response, under both the Fifth Labour government and Fifth National government, we pursued fiscal stimulus programmes. Thanks to our prudent fiscal measures beginning in 1994 to 2008, we were able to respond well. Under John Key’s National government, our government debt levels went up from 5.4% debt to GDP in 2008, to 25.4% of GDP by 2014. The Reserve Bank under then- Governor Alan Bollard dropped interest rates by 5.75% to stimulate the New Zealand economy (Bollard and Ng, 2012). New Zealand did not need to pursue quantitative easing.

According to Ben Bernanke (the former Federal Reserve Chairman and successor to Greenspan), it was imperative for policymakers in American ‘to do everything it takes’ to stop the world economy facing a modern ‘Great Depression’. They bailed out financial institutions bound to fail, they provided liquidity to the US Treasury by purchasing government bonds and rapidly expanded their balance sheets. The total assets of the Fed increased from USD$1 trillion to USD$2 trillion by 2009, and the Federal Funds rates at 0.75 as indicated in Figure 1.

Figure 1:

US Federal Reserve, “Credit and liquidity programs and the balance sheet,”

Under Obama, the US Federal government pursued fiscal stimulus programmes such as the American Recovery Reinvestment Act of 2009. This programme alone added USD$840 billion to the budget deficit. As indicated Figure 2, the federal debt held by the public ballooned from 35.7% in 2008 to 75.9% of GDP by 2017, which is more than double before the GFC.

Figure 2:

US Federal Reserve, “Federal Debt Held by the Public as Percent of Gross Domestic Product”

Other economies such as The European Union, the United Kingdom, Japan and other developed economies spent their way out of the problem. The banking crisis originating in American transformed into a public debt crisis across the developed world (except for fiscally prudent nations such as Australia and New Zealand), culminating into a sovereign debt crisis in Europe – also known as the 2011 Euro crisis.

The GFC revealed excess public borrowing. Countries in Europe such as Greece, Portugal, Ireland, Spain and Cyprus were unable to repay or refinance their debt obligations to their bond holders. Many looked to other European Union member states for financial assistance or even bail outs. An extreme example is Greece. The small Southern European country received series of 100 billion euro bailouts from the International Monetary Fund and the European Union (Voigt, 2012). Germany was the most generous of lenders. Yet despite this, Greece defaulted in 2015 (and is currently barely staying afloat with Greek government debt levels remaining well above 100% at 210% of GDP as of 2021). Many European economies are also floating along thanks to the financial support from prosperous economies such as France and Germany, and low interest rates from the European Central Bank.

Figure 3 shows that governments have been induced to borrow more as interest payments continue to decline. The European system is not healthy by any means. Debt levels and leverage are far too high, encouraged by central bank intervention and help from other countries.

Figure 3:

Euro zone general government net interest cost and financial liabilities (OECD, 2021).

In conclusion, the responses to the GFC saved the global economy facing an economic depression. However, this came at a cost. The banking crisis turned into an inevitable public debt (or sovereign debt crisis). In the United States, public debt continued to accumulate with little indication of deleveraging or fiscal restructuring. Meanwhile, Greece created political and economic turmoil in Europe, amalgamating into populist sentiment in Europe. With the Brexit vote in 2016, the European Union and the euro currency’s future remains uncertain.

If the Greek default created such geopolitical turmoil, imagine what the circumstances would be if any of the major G20 economies face financial trouble. In addition, the initial quantitative easing from central banks restarted the economy following the GFC, but it incentivised governments, households, companies to all take more debt rather than less. The world essentially buckpassed the financial crisis to the future as a short-term band aid. Then in 2020, Covid-19 hit the world starting in Wuhan, China, forcing governments and central banks to make drastic decisions.

The Fiscal and Monetary Consequence of Covid-19

The supply shock to the global economy came from a pandemic. Governments and central banks again took swift decisions. The fiscal and monetary responses to Covid-19 were very similar to the GFC, except the scale and size of the quantitative easing from central banks and deficit spending of governments were far larger. For the Euro zone the average gross financial liability levels were close to 120% of GDP. The United was 141% and the United States was 146%. Under President Biden, the US Federal government’s fiscal deficit was 15.9% of GDP for 2021. For the Euro zone on average it was 7.2% and New Zealand was 4.2% deficit (OECD, 2021). Before in 2008, the ratio of global household, corporate and government debt to GDP was 280%. As shown in Figure 4, in response to the pandemic, in 2020, this ratio had grown by 75% to 355% (IIF, 2021). The world has now mortgaged our future by getting into more debt now.

Figure 4:

Global Debt Monitor: COVID Drives Debt Surge—Stabilization Ahead? (IIF, 2021)

Governments around the world have never spent this much money in response to a pandemic in peacetime. The deficits created during the 2007-08 GFC look miniscule in comparison.

In monetary policy, the central banks have pumped more money and liquidity into the system than ever before, shown in Figure 5. ‘Trillions’ are being swashed around the global financial system (For context, 1 trillion is five and a half times New Zealand’s GDP). Bank rates are now virtually zero around the world – see Figure 6. The banks have little firepower left to tackle another financial crisis later down the track. Monetary policy has become less effective as a result of all of these responses beginning from the GFC.

Figure 5:

Consequences of quantitative easing (Yardeni, 2021).

Figure 6:

How should recessions be fought when interest rates are low? | The Economist
The Economist: “How should recessions be fought when interest rates are low?”

When the United States and the rest of the developed world entered zero-bound rates during the GFC, former Bank of Japan Governor Masaaki Shirakawa noted that when Japan was adopting zero bound interest rates and quantitative easing policies beginning in the early 1990s, he never expected other countries such as the United States to follow suit (Shirakawa, 2014). Yet, other central banks did, and they all entered a road of no return.


The global economy has entered a cross road, unable to turn back towards a period of relative normalcy. Starting with the fiscal and monetary responses to the GFC, governments have accumulated record debt, and central banks lowered its rates and printed money to stir the economy away from prolonged recessions. We have kicked the can down the road to an even more precarious future.

Both governments and central banks are stuck into a corner. Governments’ cannot stop spending, because otherwise unemployment rates would erupt; central banks cannot lift rates for the fear of sovereign default and collapses of heavily indebted companies. The public cannot stop buying inflated assets with the ‘fear of missing out’. Rising inflation and low interest rates incentivise people to stop saving and risk their future wealth through speculation. All of these government responses create bad incentives across the whole global economy.

On monetary policy, the late macroeconomist John Maynard Keynes wrote in 1936 that “If, however, we are tempted to assert that money is the drink that stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the lip.”

The effectiveness of monetary policy has now been nullified with rates close to zero percent. What can central banks do to respond to the next crisis? Bailouts? Further quantitative easing? Economists cannot predict the future, but we can anticipate risks from recent trends.

Contemplating that future is bleak. The era of normalcy following the end of the Cold War seems like a distant past. The period of ‘normal’ interest rates and sustainable debt levels seem implausible at this stage. The trends have been towards more debt, lower rates and more money printing. What will governments and central banks around the world do? And more importantly, when will this madness end? We will soon find out in the near future.


Alan Bollard and Tim Ng, “Learnings from the global financial crisis,” Sir Leslie Melville Lecture, Australian National University, Canberra (9 August 2012).

Alan Rappeport, “As debt default looms, Yellen faces her biggest test yet,” The New York Times (23 September 2021).

Bill Dudley, “The Fed Is Really Running Out of Firepower”, Bloomberg (28 October 2020).

Emre Tiftik and Khadija Mahmood, “Global Debt Monitor: COVID Drives Debt Surge—Stabilization Ahead?” Institute of International Finance (17 February 2021).

International Monetary Fund. “IMF Public Sector Balance Sheet Statistics: Database.”

Kenneth Rogoff and Carmen Reinhart, This Time is Different (Princeton University, 2009).

Kenneth Rogoff and Yuanchen Yang. “Has China’s Housing Production Peaked?” China & World Economy 29:1 (2021), 1–31.

Kevin Rudd, “The Global Financial Crisis”, The Monthly (February 2009).

Kevin Voigt, “Eurozone approves new $173B bailout for Greece,” CNN (21 February 2012).

Mark Dittli, “Central banks keep shooting themselves in the foot,” Interview with William White, The Market (6 November 2020).

Masaaki Shirakawa, “Is Inflation (Or Deflation) ‘Always and Everywhere’: A Monetary Phenomenon? My Intellectual Journey in Central Banking,” BIS Paper 77e (2014).

Matt Egan, “‘Financial Armageddon’. What’s at stake if the debt limit isn’t raised,” CNN Business (8 September 2021).


Ryan Banerjee and Boris Hofmann, “Corporate Zombies: Anatomy and Life Cycle,” BIS Working Papers No. 882 (2020)

Ryan Banerjee and Boris Hofmann, “The Rise of Zombie Firms: Causes and Consequences,” BIS Quarterly Review (2018)

The Economist: “How should recessions be fought when interest rates are low?” (21 October 2017).

US Federal Reserve, “Federal Debt Held by the Public as Percent of Gross Domestic Product.”

US Federal Reserve, “Credit and liquidity programs and the balance sheet.”

William White, “It’s Worse than ‘Reverse’: The Full Case Against Ultra Low and Negative Interest Rates,” Working Paper No. 151 (New York: Institute for New Economic Thinking, 2021).

Yardeni, and Mali Quintana. “Central Banks: Monthly Balance Sheets” (Yardeni Research, Inc. 2021).

Human misjudgement of experts

The process of decision-making is complex. Furthermore, its significance transcends both the private and public sectors, and is crucial not just in politics.

Some believe that if everything were left to the smartest people in the country, things would turn out exactly the way we planned. Experts would be able to handle everything.

But is this always the case?

Not always. American writer David Halberstam explores this hypothesis in his book ‘The Best and the Brightest’. He delves into the foreign policy decisions made by those in the Kennedy and Johnson Administrations.

Harvard’s ‘whiz kids’ were the brains of the government. The list included the brilliant Defence Secretary Robert McNamara, an executive with excellent business credentials, and Air Force Secretary Harold Brown, an expert in nuclear physics who has a PhD.

Members of the Cabinet and Advisory Board possessed outstanding industry experience or were highly regarded academics. They oversaw reshaping US policy in Vietnam. 

Nevertheless, these men ultimately failed. Although they spent over $1 trillion in modern dollars, they didn’t contain Communism.

Since the rise of Mao Zedong in China, they were convinced about the ‘domino theory’ of the spread of Communism. If it spread to one country, it was pervious to others surrounding it.  

It was an oversimplification. Vietnamese national circumstances were ignored – they simply sought independence. Vietnamese retaliation was particularly strong due to the prior experience of French imperialism.

During the period 1965-1975, the US government deployed 2.7 million soldiers. More than 7.5 million tons of bombs were dropped – twice as much as during the Second World War.   

The greater their investment, the lower the return. Mentally, the ‘sunk cost’ fallacy kicked in, increasing military and financial investment in Vietnam. The Kennedy and Johnson administrations wasted a great deal of resources due to the misjudgement of ‘experts’.

Halberstam described their efforts in Vietnam as “brilliant policies that defied common sense”.

On similar grounds, renowned investor Charlie Munger talked about recognising patterns as a way of understanding how humans behave both rationally and irrationally. Perhaps McNamara and Brown would have made a different decision had they considered the alternative.

Confirmation bias of elites leading to the double-downing of the policy that was doomed to fail. As economist Thomas Sowell once quipped, “The road to hell is paved with Ivy League degrees.”

Halberstam concluded that simply featuring ‘the best and brightest’ people on your team does not guarantee success. It’s not an indication that they can make sensible decisions without falling into fallacies. 

How Robert McNamara Came to Write His Memoirs About Vietnam | Time
Robert McNamara and President Johnson

Politics Taking Precedent over ‘Policy’

Over the course of the last two years in Wellington, I have come to realise something. Many people enter politics with the best of intentions, however, they end up becoming a part of the system. In my opinion, the majority in the House of Representatives place poll numbers ahead of effective governance and public administration. And this is failing the public. There appears to be no vision, let alone a direction, for the future of Aotearoa New Zealand from either the government or Opposition.

Those who know me well will recall that I campaigned for Labour four years ago, and at the time I was genuinely enthusiastic about Jacinda’s message of hope, change and progress. I was proud to be part of a movement that fostered change. Solving the problems surrounding the housing market, inequality, education, health, well-being, and climate change was a moral imperative for me.

The Labour Party is now in power. But how well have they done on objective metrics such as Housing? With the exception of our crisis management – such as our containment of Covid-19 – they are worse.

In the past year, house prices have increased by 32%. The inequality gap in wealth and income worsened under the current government than under any of the previous three governments combined. PISA rankings in Math, Science, and Reading have all fallen significantly. We have inadequate public health measures due to a limited number of intensive care units, and our doctors and nurses are not receiving the salaries they deserve. Meanwhile, the Ministry of Health bureaucrats have more money in their coffers without delivering any meaningful results. In spite of government commitments to spend billions on mental health, the situation continues to worsen. With regard to climate change, our oil and gas ban has caused market externalities – we burn more coal to generate electricity, which resulted in higher emissions. This is utterly unacceptable.

Politicians always claim in the media that they tried their best. In a company or in the private sector, if this was the performance result, they would all be severely questioned by the Board of Directors. However, in politics, there is no direct accountability. Failures are not grounds for dismissal, except for the voting system every three years.

However, one of the reasons for government failures have to do with the lack of competition. Currently, the Opposition is in disarray. Instead of proposing public policy solutions of their own, they are fighting among themselves. There is little incentive for the leading party to push for positive change when they are dominating the polls without much being achieved. Essentially, there is no need for them to perform better. Furthermore, the quality of politicians throughout the House is abysmal. The fact that the Minister of Justice, Kris Faafoi, had to remain in politics – despite wanting to leave – tells us much about the lack of talent within the party.

Personally, I really don’t care who is in charge so long as the performances are excellent. In a similar manner to when the CEO of a company changes, where outputs and profits stay high. For this to occur in our political system, we must cultivate more competent and talented individuals across the political spectrum. We need people that care more about ‘policy’ not ‘politics’ in the future. This is essential to the economic growth and well-being of the country.

It matters for all of us.

The West’s Departure from Sanity

Kabul, Afghanistan, recently attracted global attention. Biden Administration’s hasty withdrawal was harshly criticized globally. Many allies viewed this humanitarian disaster as undermining the credibility of the West.

The situation in Kabul is unjust. Nevertheless, we cannot forget the fundamental cause of this catastrophe in the first place. It began with the West’s dogmatic geopolitical approach after the Cold War.

The West lost its sanity following the end of the Soviet Union. Numerous efforts were then made to forcefully spread liberal democracy throughout the globe. The decision was a terrible policy idea. Western reputation was ruined, trillions were wasted, and global democracy is in decline.

The fall of the Berlin Wall in 1989, led to the belief that the West was destined to lead the way towards a more liberal world. As part of the Third Wave of democratisation, liberalism also reached Eastern Europe.

The Cold War victory over the Soviet Union led to complacency on the part of the United States. Policymakers responded to Francis Fukuyama’s ‘End of History’ thesis with greater fervour. Inadvertently, this hypothesis empowered Washington and the Pentagon.

A fundamentalist turn was observed in foreign policy. Overconfidence led to exuberant confidence. The idea that any nation could be socially engineered into a liberal democracy.

Military intervention became more mainstream. By doing so, dictatorships would be overthrown, regimes would change, and democracy would be introduced. It was ideology rather than diplomatic history that shaped foreign policy.

The liberal internationalists and neoconservatives began to dictate policy in Washington. Stephen Walt coined these ideologues ‘the blob’ in the foreign policy establishment.

In the wake of 9/11, President Bush began the War on Terror. The Bush Doctrine led to regime change in many parts of the Middle East. Intervention in Afghanistan in 2001 and Iraq in 2003, led to the installation of new governments supported by the United States.

But instead of transforming into liberal democracies, the two nations ended up fighting civil wars. The overthrow of dictatorships such as Saddam Hussein and the Taliban led to anarchy.

Domestic order was impossible with a legitimate government. The practice of beheadings, violence, and Islamic extremism has become prevalent under Al Qaeda.

The Obama Administration failed to learn from Bush’s mistakes. In 2011, a Libyan intervention exacerbated the chaos in the region. A vacuum created the refugee crisis in 2015, which triggered mass migration into Europe. This fuelled national populist sentiments across the European Union.

Evidently U.S. international reputation and credibility were damaged. Political scientist John Mearsheimer viewed these interventions as “never-ending wars”. He knew it was bound to fail.

Without an understanding of local institutions and cultures, it is virtually impossible to build a nation. Lee Kuan Yew, Singapore’s greatest nation-builder, thought America’s policies were ill-founded.

He viewed the Middle Eastern nation-building as impossible. In 2009, he said, “I see imbroglios in Iraq and Afghanistan as distractions.”

Ultimately, he was right. The United States has spent more than 6.4 trillion dollars in both countries over the past two decades. A total of 7,000 American soldiers, 177,000 local officials, and countless innocent civilians were killed.

And liberal democratic values have declined worldwide since the Cold War. Freedom House reports in 2021 that global freedom has dropped for 15 consecutive years – a “democratic recession”.

The mistakes by the United States led to a world order less liberal and more authoritarian. The balance of power in the international order has started shifting towards Asia. The liberal West is currently on the defensive.

The United States continues to be distracted in the Middle East. An emerging superpower grew militarily and economically during this period. China is now a peer competitor in the international system to the United States.

During this period, China did the opposite of the United States. Since its conflict with Vietnam in 1979, it has not entered a single war. China concentrated primarily on its economic growth and development.

Deng Xiaoping led the Chinese government into the international economy. With a new diplomatic relationship with the United States, China opened its doors to foreign investment. In 2001, China joined the World Trade Organisation.

China increased its investment in public infrastructure, including roads, bridges, and cities. Thus, real GDP increased by an average of 10% from 1979 to 2010.

To build its technological capabilities, the government reverse-engineered Western products. Its technological capabilities have been enhanced through joint ventures with western companies.

The Chinese government has modelled its style of governance on that of Singapore. Meritocracy was at the centre with a technocratic approach to public policy. Consequently, a new system of governance was conceived, based on standardised testing and performance-based results.

They focused primarily on technical expertise, such as science, engineering, mathematics, and economics.

In the meantime, the West has cooled on meritocracy. Long-term, this poses a significant problem. According to the OECD, meritocracy is of critical importance for social mobility and economic growth.

However, many institutions in the West have become hostile to the meritocratic ethos. Adrian Wooldridge of The Economist deplored the West’s departure from meritocracy. He asserted that “flawed systems to promote equal opportunity should be reformed, not replaced by quotas and a grievance culture.”

The gradual departure from meritocracy is not conducive to strong economy growth. Nor can the West remain distracted in nation-building projects. Otherwise, it will continue down the downward spiral in its international reputation. These trends have harmed the global liberal movement.

If the West does not change its course, the Chinese will become number one. When one considers that China is becoming a larger version of Singapore, it is imperative that the United States wake up.

U.S. withdrawal from Kabul did not harm the reputation of the West. Through its fundamentalist approach to foreign policy, it shot itself in the foot. Kabul’s fall is a symptom of the inherent problem, not the cause. Foreign policy goals must be achieved through realpolitik strategy, not ideological dogmatism.

Final US soldiers in Afghanistan do some last-second nation-building on  their way to the plane | 711web

Report: The Need to Build – The Demographic Drivers of Housing Demand

Leonard Hong

The political ‘buck passing’ of the responsibility for unaffordable housing by successive governments in New Zealand has created extremely expensive housing markets in cities such as Auckland and Wellington – and a national housing crisis. Auckland is the sixth least affordable city among 92 major global housing markets, according to the 2020 Demographia housing survey. The real price of housing in New Zealand increased by 171% from 2000 to 2019, compared with just 11% in Germany in the same period. Despite former Housing Minister Phil Twyford’s reforms, the government has prioritised supressing demand and targeting financial speculation from overseas. Demand-side solutions are just tinkering at the edges of the problem. Long-term demographic transformations and changing household sizes are affecting overall housing demand. Inflexible housing development is the core problem, and only freeing up enough supply can solve our housing unaffordability and overcrowding.

The projections in this report show that our housing problems are set to worsen. From 2019 to 2038, the annual average additional dwellings needed will increase from 26,246 (‘low’ migration and ‘low’ fertility) to 34,556 (‘medium’ migration and ‘high’ fertility). From 2019 to 2060, we will need 15,319 (‘low’ migration and ‘low’ fertility) and 29,052 (‘medium’ migration and ‘high’ fertility) additional dwellings annually. These figures do not take into account the annual demolition and replacement rate of dwellings and the current undersupply of 40,000. Since 1992, New Zealand has added only 21,445 net private dwellings annually to the housing stock. We are simply not building enough to meet the looming demographic changes and demands.

Our housing needs are also set to rise much faster than population growth. The average annual number of dwellings needed based on just projected population growth, excluding the smaller household size, was between 5,452 (‘low’ migration and ‘low’ fertility) and 21,543 (‘medium’ migration and ‘high’ fertility) to 2060 in our analysis. The difference represents an annual shortfall of 9,867 dwellings for the former and 7,509 for the latter (or 64% and 26%, respectively). This means housing policy using only projected population growth will markedly underestimate future demand.

Covid-19 and the Reserve Bank of New Zealand’s monetary response to the ongoing recession has led to much financial capital flowing into the housing market. Consequently, the national house price average reached $725,000, an increase of 19.8% from October 2019 to October 2020. Low interest rates created incentives for greater borrowing and investments in real assets such as financial stocks and housing. However, if sound institutional arrangements were established and growing supply could meet growing demand, there would be far fewer speculative incentives.

Local councils and Statistics New Zealand already factor demographic changes in their household and dwelling projections, but the effect of the average household size on housing demand is rarely discussed in the public sphere. The aggregate housing demand is based not just on population growth, but also the composition of each household. With household sizes shrinking, fewer people living with many children, and population ageing, we have ‘empty nests’ and ‘crowded houses’.

For this report, we calculated long-term population numbers using the demographic software Spectrum. Based on three fundamental factors – net migration, total fertility, and life expectancy – 36 scenarios were projected to 2060 (and 2038 for dwelling projections). In 33 out of the 36 scenarios, New Zealand’s population in 2060 will be larger than it is today. Under all 36 scenarios, the median age will be higher. The 36 scenarios were further narrowed to the six most plausible based on New Zealand’s recent demographic history. Among the six, the variation in median age and population size by 2060 was vast – the projected population ranged between 5.55 million and 7.26 million, while the median age was between 41.0 and 48.5 years. Even if migration is low (say, 14,000 per annum), New Zealand’s population will still grow substantially over the next few decades.

The current housing crisis is just the tip of the iceberg – if the government does not change course, future generations will face abysmal housing affordability prospects. Stopping migration completely would only produce new problems while doing little to fix the housing problem.

Demographic changes also have long-term implications for fiscal prudence. Under the six most plausible Spectrum scenarios, the dependency rate rose with population ageing, and the number of those over 65 years by at least 23% by 2060. This will result in fewer future taxpayers and more demands on working-age New Zealanders to fund public services such as healthcare and pensions.

Policymakers need to make our economic institutions more versatile so New Zealand can cope with any combination of demographic or household scenarios in the future. New Zealand had net zero migration in 2020 due to Covid-19 related border closures but this did not stop housing inflation. Politicians should stop blaming the housing crisis on migration, land banking investment, and speculation, and instead find policy solutions to free up urban development and housing supply. Faster productivity growth too would help fund additional public services in the long term.

Building now and fast is imperative for the nation’s future economic and social wellbeing.

Click below to download the two-page summary of The Need to Build: The demographic drivers of housing demand.

The housing shortage is worse than you’d thought

NZ Herald,

According to the OECD’s Building for a Better Tomorrow report, New Zealand now has the least affordable housing market for the poorest families. We have left more Kiwis with a slimmer chance of achieving the Kiwi Dream and exacerbated social inequality.

New Zealand’s housing is a national catastrophe. House prices have gone up by 37% nationally since 2015, according to ANZ. Shortages drive rising prices. And the problem will only worsen as an aging population means even more housing will be needed.

At a press conference last week, Prime Minister Ardern too called the housing market “unsustainable,” a U-turn from last year’s position of “sustained moderation” of housing inflation.

But the Prime Minister’s proposed solutions, thus far, have addressed the symptoms of the housing shortage rather than its root causes.

The Prime Minister re-launched the Public Housing Plan to build up to 18,000 social houses by 2024. Social housing is important, but would there be nearly as much need for it if a surplus of housing overall made for affordable rents? The barriers faced by private developers are also faced by government-led building initiatives, as Labour discovered with KiwiBuild.

Making it easier to build more housing in places where people want to live is the only thing that can solve a housing supply shortage.

While demand-side measures, like banning foreign buyers, can be tempting, they do not address the problem. The pandemic has done far more than any foreign buyer ban to curb housing pressure arising from overseas. International students and international visitors, each of whom needs a place to live while here, have largely gone away. Net migration has dropped to zero. But rents and housing costs are sharply up regardless.

Hopefully, vaccination programmes in 2021 can restore normality to the border. But even if the border remained closed forever, migration is only one part of growing demand for housing.  Demographic change and an aging population, all on their own, will also worsen the shortage.

An aging population, all else equal, requires more dwellings. And while those kinds of changes are incorporated in household projections by Statistics New Zealand, and consequently into Council forecasts of future housing demand, they are underappreciated in popular discussion of housing pressure.

Long-run demographic changes in household composition (such as from nuclear families to single-person households) and population ageing affect overall housing demand and require flexibility about the kinds of housing that can be built.

In New Zealand, average household size has dropped from 3.2 in the 1970s to 2.6 in 2020 (similar to OECD countries as seen in the figure below). It could drop to 2.4 in the next two decades or less, according to Statistics New Zealand’s projections. 

As family sizes reduce, median age increases along with demand for housing.

When the typical group of a hundred people consists of 20 couples, each with two young kids, and ten retired couples, those hundred people fall into thirty households. Thirty homes might be needed. When the hundred instead are 15 couples with two kids each, and 20 retired couples, 35 homes might instead be needed.

Aging populations require more homes for the same number of people.

The causes of the housing shortage have been reasonably well canvassed. Over decades, councils have borne the costs of accommodating more housing while central government enjoys the tax revenues that flow from growing cities – higher income tax, company tax, and GST revenues. Making it harder to build more housing has been one way that councils have sought to contain the costs of growth.

Years and years of restrictions on development have resulted in a construction sector scaled to the amount and types of building that have been allowed, rather than the amount and types of building that might be demanded by a growing and changing population.

The effects are stark. Housing shortages and high resulting housing costs undermine social cohesion. Families are forced to live in less pleasant and overcrowded dwellings, leading to deprivation, adverse health and social outcomes, and unstable environments for young children to grow and learn.

As of 2018, one in nine Kiwis were living in crowded housing, with Maori and Pasifika families most affected.

It will be impossible for the government to achieve promised increases in wellbeing without changing the fundamental direction of housing policy. But whatever your view on the best way of enabling more supply, the extent of the shortfall is larger when an aging population all on its own will increase the number of homes that are needed.

The government will soon be announcing its plans for remedying the problem. When thinking about the government’s proposals, ask yourself whether they enable more housing to be built, or whether they provide more tinkering around the demand side. Reform of the Resource Management Act will also be coming, but unless it improves the incentives facing Councils to enable more housing, it will not be as effective as it should be.

The housing shortage is bad enough already, even without considering the effects of demographic change that will only worsen the problem. Let’s hope that the government’s proposed policy responses strike to the root.

Why America matters – The Liberal World Order and New Zealand

“In recent years it has become evident that the consensus upholding this system is facing increasing pressures, from within and from without… It’s imperative that we act urgently to defend the liberal international order.” — President-Elect Joe Biden in 2017.

The Liberal World Order is one of the most used phrases in international relations scholarship. It’s a repetitive term, but a significant one, considering the fact that it affects everyone around the world. The United States began the Liberal International Order with the end of World War II and the defeat of the Nazis. With Franklin Roosevelt’s vision, the Western superpower set up international institutions and created long sustaining alliances for a greater multilateral and tolerant global society. Without the liberal world order and brilliant American leadership in the likes of Roosevelt, Eisenhower, Kennedy, and Reagan, New Zealand and other allied nations would have not been able to thrive during the Cold War period. Regional and international institutions such as GATT, WTO, IMF, the World Bank, European Union, and NATO provided security and economic cooperation among allied nation-states.

And yet, there are a lot of people in New Zealand that criticise America for its role as the leader of the world. In fact, many of them want to see its role reduced substantially. I agree with that statement somewhat, I’ve been very critical of their nonsensically hawkish interference in the Middle East, its naive attempts at forcefully spreading liberal democracy around the world. Its eastward expansion of NATO and the EU was also a great mistake that resulted in the military retaliation of the Russians. America’s neoconservatives and liberal hawks that were fundamentalist on the ‘end of history’ ultimately created all this mayhem.

However, if they mean America’s leadership getting entirely compromised and allowing authoritarian governments to enter that space – such as Communist China – then my answer is an absolute ‘no’. As President-Elect Biden noted, “it’s imperative that we act urgently to defend the liberal international order”. The Thucydides’ Trap is incoming at this stage in history and the US-China geopolitical contest will be the defining historical turning point for global liberal democracy. As John Mearsheimer noted before, this security competition will continue even under the Biden Administration and beyond.

So what is the point of this post? My message to New Zealanders in this blog is simple, America matters for the western world and in fact democracy itself. They have to win, and it is imperative that they do. I say this, despite knowing America’s complicated history.

In many ways, America is somewhat a hypocritical concept – it started as the first constitutional republic against the British monarchy. It set out laws for equal opportunity…but for only white men, and simultaneously set out a brilliant Federal system of power by instituting checks and balances. Constitutional amendments were made for free speech and inquiry… but also allowed slavery. It also intervened in smaller nations and participated as a colonial power during the Imperial era. Then slavery was banned under Abraham Lincoln, and racial equality was not legally achieved until the 1960s, under Lyndon Johnson’s Civil Rights Act and Voting Rights Act… and also escalated the Vietnam War. They defeated the Soviets and ended Communist authoritarianism with the Berlin Wall falling. The American Pentagon stupidly intervened in Iraq and Afghanistan after 9/11. Then elected the first African American President, Barack Obama (whom I personally admire). Then the recent events that happened in Washington is another example of historical irony at work. It is clear that President Trump and his cronies led the world to a more chaotic, less democratic and hyper-partisan society. America as the beacon of freedom or just arrogance? In short, both. The American experiment is indeed full of both hypocrisies and social progress. Even today, many social science scholars such as Cornel West suggest that the nation has not lived up to its ideals, for instance, the inadequacy of equal opportunity for all. These are all empirically and historically accurate.

However, what separates America in contrast to other countries around the world is that it’s the first serious societal experiment in human history. The United States is like the ‘Republic City’ in the television cartoon, The Legend of Korra. The nation is defined entirely by civic values rather than on race, ethnicity, culture, background, or creed. You become American by embracing its liberal democratic values, its identity based on its historical strife against the British monarchy, its constitutional values, and individual liberty. It’s a nation created out of migration and a sociological result as a historical derivative of European enlightenment.

Diversity matters to many Americans, but what is unique is the tolerance towards others, the ability to fight for freedom around the world. Liberalism is the key symbol of America and that’s the beauty of it. As Francis Fukuyama mentioned in his column last year:

Liberalism was simply a pragmatic tool for resolving conflicts in diverse societies, one that sought to lower the temperature of politics by taking questions of final ends off the table and moving them into the sphere of private life. This remains one of its most important selling points today.

Indeed, liberalism allows for diversity. Other liberal democracies like New Zealand, Australia, the EU etc, need the United States for the sake of soft power. America as a symbol is still a liberal democracy with its political institutions stable. Even though there has been a rise of neopatrimonialism in their political process which has undermined the state to be held accountable to its people. Rent-seeking behaviour among some plutocrats has undermined Americans’ trust towards its politicians and state institutions. We witnessed such examples through the 2008 global financial crisis and the federal government’s response to Covid-19.

Historically the United States has been a success story so far, but it needs to sort its own domestic affairs out. We already have incoming challenges such as AI, automation, climate change and geopolitical tensions, that will cause more drastic disruption to the world. But those challenges cannot be solved if America’s civil society and political polarisation continues. The world needs America to be the genuine liberal captain it was when it led the liberal international order after WWII. As liberals, we have to preserve our values of freedom, justice, equality and liberal democracy in the face of rising China and revival of national populism. We cannot continue this trend of a global ‘democratic recession’.

As a liberal democrat – in the classical sense – I’m hoping that the new Biden Administration would bring some common sense back in the White House. The Electoral College just confirmed Joe Biden’s victory in the 2020 US Presidential election – He will be the next President. It’s a sigh of relief for many (including me) after President Trump’s tumultuous, chaotic, and unpredictable 4-year term. Although I criticised the Democrats in a previous post, that doesn’t mean I don’t want to Biden Administration to do well.

They have a huge task ahead. The Liberal World Order and America matter to all of us.

Military Theatre

These days, even the German army cannot afford to neglect its green credentials. Pity if that’s the only thing it is good at.

German military manufacturer FFG just presented its latest tank. This is not your usual combat vehicle, not just because of its deep blue livery. It’s a hybrid.

The Genesis, as they call this beast, is a modern field general’s Prius. Except it runs on eight wheels, weighs up to 40 tons and has a 30mm automatic cannon. No Tesla can compete with that.

And it’s a technological miracle. The Genesis reaches speeds of up to 100 kilometres per hour. In silent mode, the only thing you can hear is the gun, and it can drive submerged under four metres of water.

The tank’s green credentials excite Germany’s military strategists. Pity that the rest of the German military is no longer fit for purpose.

The past decade has been terrible for Germany’s armed forces. And this time, it did not even lose a war. Hardly a week goes by without new absurdities from the Bundeswehr. It is hard to imagine how this country ever threatened anyone but itself.

A couple of years ago, only four out of 128 Luftwaffe fighter jets complied with NATO’s basic requirements. But that was still a better percentage than the German submarine fleet back then: all six U-Boats were out of commission.

Maintaining marine equipment is not exactly the Germans’ strength.

The pride of the German navy is a three-masted barque, the Gorch Fock. Though it looks like a relic from the Crimean War, it was only commissioned in 1958. It should have undergone a €10 million repair job in 2015, but five years and €135 million later, the Gorch Fock job is still unfinished.

The list goes on. Airforce pilots losing their licences because their helicopters don’t fly. Soldiers complaining they need to bring their own thermal underwear on exercises and deployments. And the army apparently only has enough ammunition for two days of fighting should the country ever find itself at war.

Maybe the Bundeswehr is just a sign of the times. It virtue-signals some modern values and guarantees that no country ever need to fear the Germans again.

Even their electric tanks would need to be recharged shortly after crossing the border.