Around the globe, monetary policy is battling rising inflation as the consequences of the response to the COVID-19 pandemic manifest. This comes at a precarious time for businesses and governments amid rising geological tensions and shifting societal expectations.
As part of his Blue Lens on Mic series, ANZ Chief Economist Richard Yetsenga sat down with former New Zealand Prime Minister and current ANZ NZ chair Sir John Key to get his view on where these trends may lead.
The following is PART ONE of a lightly edited transcript of that discussion. Click here to read PART TWO. You can listen to the full conversation on podcast below.
Yetsenga started by asking Sir Key’s view on the geological landscape, and how it has changed from when he left the NZ PM role.
SJK: I retired at the very end of 2016, so I saw those events. But what transpired over the next, say, five or six years has been very radically different to the eight years I was Prime Minister of New Zealand. I came in during the global financial crisis in 2008.
I think there are a lot of different factors that drove that change. When I came in, I think there was a widespread view among global leaders that China was an important country to bring into the mainstream, if you like. That they would be a big economic driver, that the more we embrace them, the more they would become, ‘like us’.
US President Barack Obama, who came in at the same time as me, and many other countries, really sort of reached out and saw China as being a useful and important counterparty.
I think what really happened in that 2016 period was that Donald Trump became President of the United States of America. And as we know with President Trump, he's been a deep sceptic when it comes to trade, and globalisation just generally.
But I think what is without doubt is that he almost single-handedly changed the global narrative on China. He really had to come up with a story for the Rust Belt and the flyover states and the blue-collar workers of those cities and towns about why they weren't doing well.
And his basic message in really simple terms was: ‘China doesn't play fair. That's witnessed by the fact there's a huge trade imbalance. They don't pay people properly. And actually, we should disengage from them’.
And all of that was occurring at a time when I think China itself was obviously growing rapidly and getting stronger and doing what countries do as they look to become a superpower.
I think that's been the big change. And then of course you throw in COVID and all the other different things. It's been very much a move away from globalisation, and a move away from wanting to embrace China, to having them on a list where many countries are deeply concerned.
I think that it causes all sorts of challenges for many of ANZ’s customers. So, challenging times, really.
RY: It is challenging. One of the phraseologies from the Trump period that stuck is this use of ‘alternative facts’. And Trump kind of legitimised these. And alternative facts, obviously is a polite term.
It seems to have spread. Do you think that genie can ever really go back into the bottle, in terms of their political discourse?
SJK: I don't, really, and I think the other part of that is the growing divide between what I would describe as the left and right of politics, and the sheer intensity of the political debate and discourse.
And I think a fair bit of that could probably be sheeted home to social media. I think keyboard warriors seem to be a lot braver in what they're prepared to say and what appeared to be repeat and share and even things that they know just aren't truthfully correct.
And I've just noticed even in New Zealand, really, the left and right are not separated by an enormous amount. I mean, we gravitate towards the centre. It's probably true in Australia as well.
If you think about normalised bell curve, the bulk of voters live in that middle space. In the end I would argue with you that the right of politics believes a lot more in a market approach and trusts the market and capitalism, and a belief that, if you give people opportunity, they’ll lift themselves up. And the left largely believes in redistribution, but they're not a million miles apart.
But even in New Zealand, and I think in Australia it's become a lot more rugged and difficult, let alone in the US.
RY: It's definitely different. You mentioned keyboard warriors and during your political life you went through what I might term the learning phase of social media. Now it's super advanced, can be quite caustic, can be quite aggressive.
How different does that make politics today to when politics was your main pursuit?
SJK: Yeah, well, I'm 61. I've been out of politics five or six years, and I hate sort of looking back like granddad would from the rocking chair. Because I feel like it ages me.
But these are dog years, these years. Every year there is enormous change and differences.
I mean, I remember when we first thought we were so cool, having a Facebook site and we'd post a couple of pictures to Instagram. And I remember thinking, who the hell would be interested in Twitter?
Now Elon Musk appears to be very interested and has paid tens of billions of dollars for it.
I think the one thing that's really changed has been the instantaneous nature of politics. And also the ability to go around mainstream media and to disintermediate them, really.
What that means is that, to your point earlier, alternative facts - which could be another word for complete and outright lies, at times, and misinformation - that doesn't have the filter that you get in mainstream media.
Because in mainstream media, they're always ultimately worried about the regulatory authorities that might have control over them. And also that they meet broadcasting standards and a degree of fairness, and there’s no undue bias. And there's some at least that attempt fact checking.
Whereas you don't need any of those things if you bang out a tweet or share a Facebook post. So I don't see that changing.
I think there are very wide social implications of all this. I mean, we're focussing on politics, but at one level, they can be a force for good. I mean, if you as a chief economist for ANZ, want to respond to a number that's come out, whether it is GDP or employment or any other thing, you can put out a very quick tweet. It's a lot less complicated than putting out a report or a press release or something.
And you're instantaneously dialled in to the story and people know what you're thinking. And obviously it can be a lot more from there. That’s actually very, very powerful.
But equally, you’ve got this, very different situation now. And you’re partly probably seeing it actually, with Meta, or in some concerns with Facebook. But I do think some of the social issues that we see today, particularly with young people in part can be sheeted home to social media.
I think it's mind blowing and it's all absorbing. And it's really tough on them, I think, young men and women. I just think, social media's got a lot of good, but it's got a lot to answer for as well.
RY: When you were prime minister, how often did you speak to the press or were in direct contact with the press, compared to what a politician today, the level of engagement they might have to have?
SJK: Well, I used to dream of the time when, if you go back to the 1960s, when Sir Keith Holyoake was Prime Minister of New Zealand. Because there's a famous picture of him holding court with the press gallery, which was three of them standing on the other side of his desk as he rattled off the facts that they would be putting in the paper or whatever that day.
Mine was a lot more robust. But we would have daily stand ups, sometimes two or three times a day. And we had quite a big diet of media, you know.
We were seen as very, I think, genuinely very accessible. We would be dialled in to stories and quite active. But now in social media, it's even much more aggressive and different.
What was deemed to be news 60 years ago, even 10 years ago, these days it's everything. I mean, there was a story running around about Matt Hancock – the old health minister in the in the UK - going on a celebrity show. And all social media is full of all of it. Whether he should be or shouldn't be, and even that those shows exist.
We just live in a different world. A more instantaneous world.
RY: Yes, completely different. Can we switch to macro for a little bit? Like politics, the economic challenges today are radically different from five years ago.
Inflation is obviously the biggest current issue and it's been the gift that keeps on giving, in a sense it's just kept surprising, not just in New Zealand, but globally.
With the US having such an outsized influence on all of our prosperity, do you think the Fed can manage a soft landing?
SJK: I would be surprised, actually. I’d have to say. Firstly I think if you go back over the last 20 or 30 years and have a look at every single sort of economic hiccup or crisis that's come along, from the GFC, to the dot com bust or various different things; the Asian crisis.
The response of central banks around the world - and governments - has been to very much try and avoid those crises. And so the response has largely been printing money, flooding the system with cash, trying to put confidence into the financial system that everything would be okay.
And you know, the GFC was dominated really if you think about it by a banking crisis in the United States and that morphed into Europe. But really that was the response.
And you certainly saw that with COVID. The playbook was a pretty easy one to pick from. Here in New Zealand the Reserve Bank engaged in quantitative easing, printing cash. The government spent money like no tomorrow. It was a very different world.
But of course at some point inflation was going to show up in the system and it came along, I think for a variety of different reasons, from supply chain issues right through to labour shortages.
But it's there that's entrenched and, as you know better than anybody else, inflation is as much about expectations as anything else. And now the expectations are that prices will rise. And I think putting that genie back in the bottle is not easy.
And I remember times in New Zealand's history where inflation was a significant issue, and it took the sort of dogged determination and a whole lot of pain from people like a Reserve Bank governor, like Don Brash, who raised rates.
And I remember at times we thought this was crazy, the amount that they were raising rates by, to ultimately break the cycle. It'll be interesting. Can you do it? I mean, in theory, you can get a soft landing, but this is what you’re countering against.
At ANZ New Zealand we just had a board meeting a few weeks ago, and on the one hand, you look for stress in the system, right? Because you just sort of see all of this stuff that's going on and you say, well, this is going to be incredible, all these rate hikes.
But unlike Australia where you're 80 per cent floating and 20 per cent fixed, so at least any changes - they're much more muted obviously, under Philip Lowe and the RBA in Australia - in New Zealand they are 80 per cent fixed and 20 per cent floating, so it takes so long way to flow through.
We still think 57 per cent of ANZ New Zealand customers - and we're the dominant bank here by far in terms of scale and size and everything - still have a fixed-rate mortgage with a two or three in front of it and that’s going to roll off in the next six months. So that’s the first thing.
Secondly, you've got a very, very tight labour market. So what's happening is wage rounds are going through and if we look at source income, what we see is that for ANZ customers, their source income has risen about five and a half per cent in the last 12 months.
So, at one level they're going to face these increases - and it's not obviously just interest costs, it's energy and it's everything, you know, the cost of a latte. I mean, everything's gone through the roof. But they’ve also got pay rounds that are mirroring that. And it's not inconceivable is it, that over the next two to three years, pay rounds look something like a 20 per cent increase for workers? They get 6 per cent or 7 per cent. Plenty of them have been going through in double digits in New Zealand.
So will they really hit the brakes? I mean maybe, but logic would tell you they should. So that just might force central banks to really, really have to tighten. And if they do, at some point, it's very hard to see how that ends in a soft landing, in my view.
RY: The cycle and history are against them, no doubt. It does seem to me, though, the strength of consumer balance sheets is contributing to this inflation challenge. But that also, I think, hopefully means the landing is not too bumpy.
There probably will be some bumps and in a way, as you suggest, there needs to be, to bring in inflation psychology back to a more even position.
Is there a policy package or a policy approach that's better able to address cost of living issues rather than what is largely a reliance on central bank activity?
SJK: Look, it’s challenging, isn’t it? I remember Ruth Richardson, when she was finance minister, saying monetary policy needs mates.
No doubt after the Aussie budget, Richard, you wrote quite a bit of stuff, but I was in Australia for a group board meeting and I saw Jim Chalmers on TV and I thought he gave a pretty careful and considered response, but pretty much said we can’t afford to overheat things.
And even though we know energy costs are going up for consumers and the likes, actually, if we just pump too much cash into the system, the response will be for the Reserve Bank of Australia to have to raise rates by more.
I think governments are going to find it hard, actually. On the one hand, there's no doubt inflation bites hardest on the least well off. I mean, the blunt reality is if you look at the UK, over this winter heating period - I was in the UK a few weeks ago and they were saying the average household budget, the winter heating bill for a low-to-middle income family would go from something like 6 per cent of their household budget to 40 per cent.
Well, they consume everything they earn anyway, so something's got to give, doesn't it? They're going to the certainty of a trade down from steak to sausages. There’s no doubt about that. They’ll spend less money on other things.
I think the government does that where it targets a response - well, has to target it to those really in need, and be careful, I think, of very universal responses because that's a problem.
I think secondly you have to sit there and say ‘well ok, what's driving your inflation, and driving your concern?’ If you take New Zealand at the moment, it's actually very hard to get into a good restaurant, pretty hard to get into any restaurant.
So on the one hand, is that all because, to your point, we saved over COVID through government transfers and everything else, or is now operational in a lower number of days, and a lower sort of seating plan because it can't get staff.
I think in the end, if you want to resolve these issues, you ultimately need to unblock the choke points. And they are around labour markets and labour market mobility. Probably to a degree, it's always about capital and productivity.
And I think you've got to do the things that aren't very sexy in terms of an announcement when you're a prime minister or a politician, but actually long term put the economy on a footing where it actually can give you real and productive growth. And that is investment in infrastructure and the like.
It's a little different to the sugar hit of just throwing money at people.
RY: The pandemic was obviously a frightening period and difficult, but as you allude to, once policymakers recognise the danger they were facing, it did become kind of an everything on the table all at once thing.
And in fact, the UK experience, and governments everywhere, are really struggling to step back from that enhanced role they took in the economy. Government spending is struggling to return to pre COVID levels.
What do you think the implications are of this kind of bigger government involvement in the economy?
SJK: Well, bigger government requires more fuel in the tank to make it run. And that ultimately has to lead to a higher tax environment.
And if you are like me and you believe that, ultimately you can rob people of the desire to go to work and earn the extra dollar if you tax them enough, then actually, that’s bad, because ultimately you want people to be entrepreneurs, to take risks and to work and go the extra mile to retrain and to take on greater responsibilities.
I mean, I think people who say that tax isn't a motivator, they often are the same people that also want to put a tax on something they want to see less of, like plastic or fossil fuels. You can't have it both ways; either you think they work or they don't work. I think they do work.
I think big government generally isn't great. Secondly, I think the problem with big government is you're assuming government knows best, and the bureaucracies are efficient.
Actually, generally speaking, my experience is there’s a lot of well-meaning people in the bureaucracy. I mean, they worked for my government and they worked for the government after. Like Australia, our civil service is neutral and actually full of some very good people.
But man, they take a belt-and-braces approach to everything, for obvious reasons, because the political risk is on them, if something goes wrong. So they're not efficient, necessarily. And I mean, they can just make the wrong calls.
And that sort of fine, but firstly, you might get very political responses. Then secondly, you just assume that they call it right. Whereas what happens in the market – and I mean I’m not saying the market's perfect, and sometimes it can drive sort of weird outcomes - but there's a reason why we set up systems that allow companies to be established, and even fail, in good years and bad years with a great degree of rapidity.
And the reason we do that is because we know that the market drives capital in the right places eventually. If you look at the technology sector in the last 20 years, it's driven the huge amount of entrepreneurial activity, a huge amount of innovation, and actually lifted productivity and the way we all act.
That's why we all want to go to ANZ Plus or ANZ Go Money and not go into a branch as we find it a lot more convenient doing it from our home or our desk.
I worry the government - I mean, I don't want to sound like Ronald Reagan, but “I'm the government and I'm here to help you” - I don't think that’s the answer you really want to hear most of the time.
This is PART ONE of a lightly edited transcript of that discussion. Click here to read PART TWO.
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