Geoff Simmons and Bernard Hickey discuss the options New Zealand has in a zero interest rate world

Geoff Simmons and Bernard Hickey discuss the options New Zealand has in a zero interest rate world

By Geoff Simmons*

Finance Minister Bill English attended meetings at the International Monetary Fund (IMF) and World Bank recently, and returned reaffirming the Government’s commitment to reducing public debt under 20% of GDP.

He thinks that is the most prudent strategy in these uncertain economic times.

Meanwhile the rest of the world is struggling with stagnant growth despite years of record low interest rates.

In some countries interest rates are now even negative.

Overseas Governments are starting to ask what action they can take in a zero interest rate world, and the IMF is advising them to spend more.

In this Face to Face I talk with Bernard Hickey about these issues and what options New Zealand has to stimulate the economy as interest rates edge towards zero.

Geoff Simmons is an economist working at the Morgan Foundation. This article is here with permission and first appeared here.

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Inventing a new bomb ain't too bad an idea :).
Also I like that someone actually realizes that we have VERY low debt!

I just love theory on how to save the world, by indebted means, Money Wise??.

I just love the theory of vested interests, who do not want the world to crash, whilst they are at the wheel. It would not be in their interest, money wise??...interestingly, enough.

I just love the theory of driver-less cars, with no one at the wheel, paid for by people with theoretically no money, just debt., electric or otherwise, Musk is theory personified.

I just love the theory that all is well in lala land, whilst importing all these theories, by various theorists, hoping that their theories, might in theory, keep em in the well paid jobs, theoretically, for the rest of their lives, in theory. The theory is houses, will always go up, in theory to, pay for these theories, theoretically, a theory one can repeat, in theory, as is their and my practice, in theory, the theory, is never ending, but practical theories, have in theory, never theoretically, worked on a daily basis, theoretically, as putting in a days work for theoretic reasons is theoretically impossible, unless the theory works and they get paid, in theory., this should never happen.

In theory, I am wasting my time, but theoretically time is linear, so cannot go back in time, in theory, to recant the theory of the theorists of the theory, that you can.

Theoretically speaking, I am not speaking, as a theorist, you understand, as I am sure you theorists could say say I am type cast, not a theorist as not paid to repeat, this drivel, theoretically. Not in my interest to do so, as in theory, I do not have to work, ever again, as I am theoretically , not insolvent, past it and retired, from the theory that proves the rule, that theorists are not required.
Worked for me. Hope it works for you.
No charge, my time is free, as is my own, waste of space, I am not an indentured theorist, as I always worked on that theory, looking backwards, towards the future. Theoretically, I should be richer than most countries, but we shall see if that theory, actually works in practice, into the foreseeable futures, if my theory is correct.

All rebuttals, should be addressed to my accountant, who in theory, should know better.
Money for jam, theoretically. Conjured out of fresh air, but theoretically applied.
As is my bread and his ...only theoretically mind....butter.

Good theory, but in practice you got carried away.

Unlike the rotting carcass of the dead horse. It's still setting round stinking the place up.

geoff and Bernard are making the big assumption that CPI inflation will not be an issue in the future... that deflation will forever be the "environment ".. ( thou they are talking about things in the context of 0 interest rates )

Also... it is very possible, in a global sense , that if the next round of Central Bank measures involve some kind of .." helicopter " money.... it could precipitate a movement out of financial assets...

If NZ did what Bernard suggests, in that environment, .... it might be a disaster.. ( again... I do realize they are talking about 0% rates... which would only happen if we had deflation... which I think is unlikely )

The UK have cracked inflation with brexit, with the pound plummeting prices are now increasing

Personally I don't see how the rising cost of the basics (upwards of 10%), could possibly be considered a good thing. It just further squeezes the budgets of those already struggling.

Those borrowing EUR and YEN to borrow USD find themselves paying up way above negative rates via the cross currency swap despite domestic flat to negative interest rate structures.

A dollar-based investor needs just a few steps to turn Japanese three-month bill returns positive.

To buy the bill, yielding negative 0.24 percent, a fund manager can borrow yen, lending dollars in return. As part of that agreement, they’d pay the three-month yen London Interbank Offered Rate -- now at about negative 0.02 percent -- and receive dollar Libor -- at 0.82 percent.

But the trade becomes especially lucrative because of the basis spread on the cross-currency swap, which determines the cost to convert payments from one currency to another. The swelling appetite for dollars has led that spread to roughly double in the past year, to 64 basis points, or 0.64 percentage point, close to a 2011 high. The dollar lender also receives that amount.

All in, the dollar-hedged yield on three-month Japanese bills is 1.24 percent, near the highest in at least five years, Bloomberg data show.

“This is a quasi-money-market trade, and it looks like a very efficient and appealing thing to do,” said Quentin Fitzsimmons, a money manager in the global fixed-income group in London at T. Rowe Price, which oversees $777 billion. “Yet that distortion has been present for quite a long time -- it hasn’t been arbitraged away.” Read more and more and more and more

Doesn't ANZ point to a derivative of this type of financial engineering when claiming rising foreign wholesale funding costs prohibit lower mortgage rates, but not retail deposit returns?

Yeah but if prices do increase can they raise rates or is there far too much debt to do so?

then say bye bye to foreign investment and expect to see the NZD collapse.

Bernard explaining to an economist how the economy works.

Maybe Bernard should teach more economists because they are all clueless

It's willful deliberate ignorance Mike B. These evangelists of monetary orthodoxy have painted themselves into an ideological corner, in professing that the blunt, brutal tool of interest rates are only mechanism for addressing the price level. Like Upton Sinclair said, ""It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

These clowns prescribe a single solutiont for all manner of problems. Who would go to a doctor if he were to make a prescription for one drug to treat each and every ailment? The whole rationale for resorting to financial mechanisms to allocate resources began to gain currency in the 1960s. Such decisions are fundamentally political decisions, but the various propaganda organs of the neoliberal corporate and political elites have relentlessly enlisted the intelligentsia and the media into effectively brainwashing the public to take ideological positions against their own best interests. Remove any degree of public accountability or regulation of the Reserve Bank. Provide them with a single blunt instrument with which to deal with an incredibly complex problem. Open the spigot to endless flows of hot money to flood into our real estate markets, attracted by our relatively high interest rates. Make this country a landlord's paradise with all kinds of tax loopholes and privileges. It's a recipe for a social calamity.

"A simple way to state Krippner’s thesis is follows. In the 1970s, politicians got tired of fighting over who would get what, and just turned those decisions over to the depoliticized market. This is known as ‘financialization’. Then political leaders didn’t have to say “no” anymore to any constituency group, they could just say “blame the market”. It’s very much akin to the rationalization for inequality one hears from elites these days, that it’s globalization and technology, as if those are just natural trends with no human agency or decision-making involved."

"ers. Instead, these states respond to a depression by trying to reduce their expenditures to the level of taxes and other revenues. However, since they compose such a large part of their economies, and since the problem is overaccumulation of capital, the hit is two-fold.

First as they reduce the size of their expenditures, they directly reduce the size of their economies in proportion to the size of these expenditures to the size of their economies. This can be half or more of these economies, since they have fairly lavish social safety nets. Second, despite the state reductions of expenditures, newly produce capital is constantly entering circulation adding to the problem of overaccumulation, which overaccumulation is not being addressed."

To each their own is an opinion.
I don't know how many economists you have met, but the vast majority of them are readily open to debate on their discipline. More so than any other disciplines of science.
What does annoy us though is the fact that none of you can ever come up with any valid alternatives or theories, despite the constant barrage of ridicule.
To use a modification of your example of a doctor; who would go to a doctor to treat an ailment and then blatantly disagree with the diagnosis or prescribed treatment?

A perfect example of the misunderstanding is highlighted by "The whole rationale for resorting to financial mechanisms to allocate resources began to gain currency in the 1960s".
What about the long periods of industrialisation the western nations underwent about 100-150 years before your 1960s period? Where was the government intervention during this period?

Nymad.... I have found that the best economic "maps"... "stories" ... descriptions of the "landscape" etc. are by people who actually participate in the markets... eg.. George Soros, Ray Dalio, etc.

Academic economists tend to be far too attached to their stories, and don't have the same ability to question, inquire , and adapt... ( they tend to focus on the last war ) and I get the sense that there is a subtle indoctrination in the academic process of going thru university etc....??

Maybe that is because the markets are brutal.... ie,.. If my "Map" (theory ) is wrong the reality of the mkt very quickly tells me...and I lose money and continually have to revisit the beliefs I hold to be valid.
Maybe thats why the likes of Ray Dalio have , what I believe are, better maps of the economic landscape...???

After watching mkts for 40 yrs, ...I'd suggest that economies are evolving organisms .... they are fluid and changing... I have found that "practical economists" are always looking for the unintended consequences ( higher order effects ) of Govt and Central bank economic and monetary policy..??

I'm not knocking economics as a field of study..... and I do think , with the benefit of hindsight, that it would be healthy if the likes of Treasury and RBNZ empoyed more economists with diverse views... I understand that they employ mostly likeminded people..??? eg.. Would these institutions ever employ a " Minsky" .. a Steve Keen...a Michael Hudson...etc... ???

Am I too critical..??


There is no valid reason to cut the OCR further. It will be terribly difficult to raise the rates back to normal in the future without killing the economy. NZ is doing reasonably well (compared to most other countries).

Yes we need to keep paying those exuberant mortgage rates at 5% and 6% where the rest of the Western World is paying 1 to 2% mortgage rates. Mean while were still screwed over for saving rates, well at least we're like the rest of the world on that one. Bahhhhh......

Got to keep those Ozzy banks happy. Bahh, Bahh...

I think you'll find most NZ mortgage rates are sub 5% while TD rates are >3%. For example, 1yr fixed for most banks <4.30% while 1yr TDs are around 3.5% ... 0.80% difference. Compare this to USA - 1yr TDs @ 1.30% and mortgages around 2.50% ... 1.20% spread.. you understand it's 2 sides of the same coin, right? The TD rates in NZ are some of the highest in the OECD.

Wow, sub 5% mortgages yes that's really impressive NOT! I still think we're being ripped off considering how low saving rates are.

And how are Kiwis supposed to afford a home and obtain a mortgage at such high rates when they're faced with such a high amount of competition from Foreign Buyers who can get very low mortgage rates over in Asia.

Stop foreign buyer then you can get away with pedalling the high mortgage rates. And relying on money from foreign buyers to massively inflate house prices and increase GDP growth is a false economy.

Actually, I don't think lower interest rates will make a whole lot of difference to household budgets. At 4.5%, a $500,000 mortgage will cost $584/week. At 3.5% the weekly cost falls to $517, a benefit of $67/week (or less than $10/day). At 2.5% it falls to $455/week.

But lower interest rates definitely will encourage buyers/bidders to 'go higher' to get their house.

If you can afford $584/week for a $500,000 mortgage, at 3.5% you can afford a $565,000 mortgage, and at 2.5% you can afford a $641,000 mortgage.

Lower rates are just as likely to push up asset prices as anything else, leaving those that can't afford more that $584/week still unable to buy. That is clearly what has been happening, country-wide.

The only situation where this won't occur (especially in Auckland) is if we have a massive increase in housing supply in a short time frame. Christchurch proves that.

or a equal reduction in demand, always two sides to the supply and demand equation.
excess supply of volume of and cheap credit is why the world has many problems, it has kept many suppliers producing whilst the demand is not there leading to low inflation and in some cases deflation
we need a good balance extremes either way distort.
and to me too much cheap credit is distorting consumer prices and asset prices by artificially increasing demand for both

I agree with you about people bidding up prices to what they can afford. I wouldn't read too much into Christchurch as the earthquake created a shortage in a very short time period and then the rebuild replaced it which a large supply coming on within a very short period also. Auckland has developed a shortage over a longer period of time and the response to the shortage will be much slower also. The types of houses being built are not the types we need. 5brm 3 bath room McMansions for $1.3m aren't providing first home buyers much help. Increasing the supply of houses more suited to FHB's would help. I've seen sections which could support duplex 2x2bedroom houses having 5brm 250sqm houses being built on them. Developers obviously find that easier than building more suitable houses. 1 lot of council fees vs 2 probably helps them too

With Christchurch there is still supply - but is there still demand......

Is there still demand in Christchurch?

The demand is huge in the lower to midrange houses.
everything that goes on in this range is selling and for increasing prices.

Wait till next months sale numbers come out and I beleive the sales numbers will be good.

The investors have had their wings clipped abit with the new LVR regulations though.

Open Homes I have attended in the last 2 weeks have had 10 to 50 lots thru most houses in the midrange houses.

Auckland and Overseas residents are buying now!

With falling rents demand from investors will be muted.

The Digital Economy Should Be about Capital Creation, Not Extraction

Direct government spending on infrustructure is something I have framed here before as the central control of the consumption of resources taking over from private control. Perhaps a step towards fascism.

But is it realistic to expect this? A quick google search finds that government spending in the height of the depression was 31% of GDP, and dropped to 24% before WWII. Currently government spending is at 47.5%, down a little from the recent peak of 50%.

Just like central bank control of interest rates, there is little headroom left. Perhaps a better analysis of the the reasons for the lack of headroom needs to be conducted before solutions are proposed.

Zero..go for it.

Zero Interest, gets my vote.

I have changed my stance, it is what us altered egos do.

We can take any stance we like, as we float through space, like a warped speed ...astro-naught.

Zero rates would be so beneficial, it is unreal.

I never thought a Bank would be so generous, as each and every one would benefit from zero gravity, as the current gravity is getting beyond a joke.

Free money is all that stands between a collapse of housing and a run on the bank.

Free money is all that stands between a balloon environment and a distressed nation, most of em...I hasten to add..

Free money is the best derivative of all.

Unfortunately a little prick in the middle, may soon bring the whole working system down to earth.

But wait.!. If it was all, nothing to argue over, zero rates for ever.

We shall all be free of slavery, till the day we die.

If you do not have the Middle Class and the Working class, then free money is all that remains.

Why did no one think of it before. Why struggle, why fight, why talk endlessly round in circles.

We do not need conjuring systems, counterfeiting measures, tax systems, free market theories, that ain't, free enterprise, that is not free, free market forces, forcing little kids and their mums to perish in the name of Mamon, Putin, Assad, Mossad, ISIS, Obama, Bush, Allah, Jesus Christ, pick any name, faction, god, or poor head of state, ye like...I am not one eyed.

Nobody works, nobody is divided down the Middle, the ones with Money pay for us all to do nothing.

No rentals, no rentiers, free up everything. Free houses, for everyone.

Trillions is OK, I can take it. I can distribute it....freely.

We could all have a fantastic time with this free lunch, free education, free holidays, free food, heat, houses, cars, rocket ships, dog kennels, as every day, we would be free as a bird.

So thanks Bernie and Geoff, it is what we should all aim for.

No wages of sin=death.
No nothing surer than taxes, just natural death in all its glory, as we could have a magnificent life, no death insurance needed, no sickness benefits nobody could not afford, no housing rates to comply with, no interest rates of any wars over nowt.....but OH WAIT...?

Calamity......nothing worth blogging about at all. cos it is all Free... Interest Free.

So nothing worth writing about either...fellas.

And as we all know....that is not what you all stand for really, no free interest, cos someone always needs their slice of the cake.

And will kill me for probably

That is why it ain't free....someone always wants more than their fair share.....and will kill for it. Religiously, Democratically, Commercially, whatever.

The die is cast.

If interest rates go to zero... The phone at "Morris and Watson" will be ringing off the hook.

I love the first comment - very low debt you say?
Govt debt is only a small part of the iceberg
Add private debt and corporate debt and what do you get?

Also - measuring values as a % of GDP has its flaws.
If GDP falls - the % rises dramatically
If interest rates rise - the serviceability becomes an issue

And to simply compare yourself to a bunch of crack-heads does not mean you aren't a crack-head.
The fact is most govts have unsustainable debt.
NZ's total debt (public, private and corpoarate) is over 200% of GDP.
That's not low even when you compare it to the crack-heads

And one more thing - a fall in the NZ dollar will be disasterous considering all of NZ govt debt is financed overseas. (not to mention private or public debt).

Remember Argentina - they went into default back in 2001-2003 with a debt to GDP of just 50%.

Something to think about folks

People forget that we pay debts with dollars not percentages. Often USD. It will take a few years for high interest rates to come back but when they do consumer spending will take a big hit. Everyone needs to pay down debts while interest rates are low to survive the eventual uptick.

Zero interest rates will be the "teaser" enticing you to borrow. And then the bond markets worldwide blow up and whammy - up goes the interest rates to "re-price RISK".

This will be an epic failure.

If USA goes negative - watchout.

But Im sure some of you will leverage up and buy more bubble property. Forget any productive asset. Just buy the bricks and mortar!