Of Interest

Ten years from now Kiwibank CEO Steve Jurkovich wants New Zealanders to be thinking about their big five, rather than big four, banks, with Kiwibank in there mixing it with the four Aussie owned banks and not the smallest among them.

In the latest episode of interest.co.nz's Of Interest podcast, Jurkovich speaks about where the now 21 year-old Kiwibank has come from, where it's at, and where it's heading. This comes with the bank having just posted a 34% increase in annual profit to a record high of $175 million.

"I'd certainly like New Zealand to be thinking about its big five banks. And I guess my stretch goal is that we're not the fifth biggest, we're the third or the fourth. And I don't think there's any reason we can't be that. Whether I'm here running it or not, I hope I've played my part in getting it there. I'd like people to look back and go 'remember when it was only making $175 million? Remember when it only had a million customers? And look at it now'," he says.

Speaking about the Commerce Commission's market study into personal banking competition, Jurkovich says if they want a bigger Kiwibank and more bank profit staying in NZ, New Zealanders need to exercise their choice.

"Because leaving it up to the Government, and we have lots of people in New Zealand who complain that the Government does too much, I don't think is going to change anything. We have to be good enough to earn your business, and you have to be fired up enough to make a move. And if we can get those two things together, then we'll have a way more competitive market place." 

Jurkovich also reveals he has been meeting weekly with the CEOs of the big four banks - ANZ NZ, ASB, BNZ and Westpac NZ - for about the past month to discuss mounting concerns about scams and frauds being committed against their customers. The New Zealand Banking Association's CEO Roger Beaumont has facilitated these meetings.

"If I think about the things I really worry about, scams and fraud are definitely one of them. Our own fraud rates are growing at north of 100%," says Jurkovich. "This needs to be a joint arms race otherwise we've got no chance."

In the podcast he also talks about tough times in the housing market as customers' mortgage payments jump, the potential for a partial government sell-down of Kiwibank via a share market listing should the Government change in October's election, Kiwibank's plans to grow and build capital and what a requirement to pay a chunky dividend would mean for these, how the bank has moved on from an expensive, failed core banking system upgrade just before he joined as CEO five years ago, why Kiwibank won't be entering the institutional or rural banking markets anytime soon, and the bank's role in a decarbonising economy.

"I really feel like a 21 year-old. We're just getting started," Jurkovich says.

*You can find all episodes of the Of Interest podcast here.

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New Zealand survived a tight electricity supply situation on Friday morning - the 12th so far this year.  

It happened after Transpower warned the residual quantum of electricity available for use was sinking towards the 200 megawatt danger mark between 7 am and 9 am. 

In the end, the 200 megawatt level was not breached, and even if it reached zero, unused reserves would still be available.

But it is a predicament that keeps Transpower on constant alert, which it warned about in May and again a month later. 

This subject and other energy problems are the subject of the latest interest.co.nz Of Interest podcast.  

*You can find all episodes of the Of Interest podcast here.

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Like it or not banks are a cornerstone of our economy, meaning they'll need to be a key influence in the push to decarbonise.

One of the ways BNZ is trying to do this is through membership of the Net-Zero Banking Alliance (NZBA).

Speaking in interest.co.nz's Of Interest podcast Rebekah Cain, BNZ's Chief Sustainability Officer, describes the NZBA as "a group of banks committed to transition the finance sector to net-zero." Finance, she notes, is "a key lever to pull in order to shift the real economy."

"Part of the reason for this is because if something is funded it happens. And if it isn't funded it doesn't happen," Cain says.

The industry-led, United Nations convened NZBA has 133 bank members from 43 countries holding a combined US$74 trillion in total assets, which is estimated to be 41% of global banking assets. BNZ's the only New Zealand member, although the Aussie parents of all NZ's big four banks are members, as is the Dutch parent of rural lender Rabobank NZ.

BNZ's NZBA targets disclosureinitially features2030 targets for the coal mining, dairy farming, power generation and oil and gas sectors. For dairy, which contributes 23% of NZ's annual export earnings and 22% of its annual gross emissions, the target assumptions include reducing dairy cow numbers, lowering milk production, and less use of nitrogen fertiliser.

For BNZ Cain acknowledges there's both derisking going on and lending growth opportunities being eyed. In terms of the latter, in the power generation sector BNZ's assuming a 50% increase in electricity demand between 2020 and 2050.

"I think the focus needs to switch from what's being taken away to the opportunity that exists," she says.

NZBA criteria features 10 sectors banks needs to have targets for. That means by November next year BNZ must also have targets in place for other parts of the agriculture sector such as sheep and beef, and residential real estate where it has its biggest lending exposure.

The NZBA has been criticised with Germany's GLS Bank quitting in February over concerns about US bank members continuing to support oil, gas and coal projects in emerging markets. 

"Any of these initiatives are only valuable if they are interrogated and criticised. Otherwise it's really easy to sign-up, set and forget, not really report on it," Cain says.

Due to being part of the NZGA and NZ's new mandatory climate-related disclosure regime, Cain says BNZ's having internal conversations they were never having before.

"So that has got to be good."

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At the heart of suggestions the so-called BRICS countries may develop a new international currency system based on gold that's separate from the US dollar are some simple necessities, according to Nathan Lewis.

The United States-based Lewis spoke about this issue in a new episode of interest.co.nz's Of Interest podcast. Lewis runs New World Economics, is an author, a former analyst and money manager for institutional investors, and a fellow of the wealth and poverty programme at the Discovery Institute think tank.

As Lewis puts it, the BRICS countries - Brazil, Russia, India, China and South Africa - need or want some plumbing for trade and debt financing for their governments and corporates.

These countries have been coming together at least in part because their trust and satisfaction with the US-led global financial order, which has the US dollar as reserve currency, has been declining. This has increased as tensions between the US and China have heightened, and following Russia's invasion of Ukraine, which saw it locked out of the Western financial world including the SWIFT international payments system.

"What was low level grumbling for a long time now has become active efforts to create a new alternative," says Lewis.

"The first basic need is just to be able to buy stuff."

"Most of these countries' currencies have a history of mediocracy or outright failure, which means they tend to fall in value a lot. So no one wants to borrow or lend for any length of time in Russian rubles," Lewis says.

"They need a currency that's reliable enough so they can access the world debt markets, that international lenders will buy these bonds and their own people will buy these bonds. Historically that has meant 'pay me in dollars'."

So why gold?

"They want to land on some kind of internationally acceptable medium...There's one thing that everyone's always been able to agree on and that is gold," says Lewis.

"The reason why it [gold] has been the basis of money for literally 5000 years is because it works. And the reason it works is because it does not vary in value very much. The basic premise is that gold is stable enough [so] it doesn't really cause a problem."

The 15th BRICS Summit scheduled for Johannesburg between August 22 and 24 will be watched closely. Basically these countries want a financial system that functions even if the US does not approve, says Lewis.

If such a system gets off the ground, what might it mean for a small trading nation like New Zealand, that's close to the US but has China as its key trade partner? Lewis expects pragmatism. Ultimately, he suggests, you could; "just go down to your local office of the [Industrial and] Commercial Bank of China and open an account and you're in."

Lewis envisages a scenario where; "99.99% of the time you're just trading gold checking accounts, it's all digital. But if push came to shove yeah, 'you've got to deliver some gold buddy'."

"So I think there are ways of minimising the need for international cooperation," says Lewis.

*You can find all episodes of the Of Interest podcast here.

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2023 has become the year of AI. Hype and doomsaying about AI, or artificial intelligence, is hard to avoid.

A key catalyst was OpenAI's release of AI chatbox ChatGPT late last year. So should we be excited or fearful about the rise of AI, or both? 

I discussed this with Michael Timothy Bennett, an AI researcher at the Australian National University, in the latest episode of our Of Interest podcast. Bennett is recently returned from a major Artificial General Intelligence conference in Stockholm where he both presented and won an award.

He described the mood at the conference as "feverish and exuberant," noting "suddenly there's a whole lot of money and power at stake" in the AI industry.

So what are we to make of all the hype around AI, and what might it mean for our lives?

"It's sort of the next step in the industrial revolution more than a lot of what we'd see in, say Terminator," Bennett says.

"AI is like a collection of black swan events that are going to play out over the next several decades as we see different sorts of jobs and industries hit with a lot of automation. Things will get much easier for some people and a lot harder for others."

In the podcast he talks about just what AI is, its origins, ways we've been using it for years, predictions of AI-derived productivity gains and job losses, and whether the New Zealand government should be looking to regulate AI technology.

He also offers suggestions on how young people heading into the workforce or considering career options should think about AI, how middle aged workers should think about it, what it means for business owners, and how investors should be considering AI.

Bennett also weighs in on the debate over whether AI is an existential threat or could be humanity's salvation.

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Central banks' use of monetary policy to fight inflation is working, but in New Zealand we need to look at evidence demand and prices are being impacted rather than current inflation data, says ANZ Banking Group Chief Economist Richard Yetsenga.

Speaking in the Of Interest podcast, Yetsenga says news of an inflation fall in the United States suggests the Federal Reserve is close to an extended pause having increased its Federal Funds Rate to between 5% and 5.25% from 0% to 0.25% since March 2022.

US consumer price index (CPI) inflation rose 3% in the June year, down from 9.1% a year earlier. Yetsenga expects another 25 basis points increase from the Fed, after which he expects a period of pause.

"It's not obvious that pause will be followed by further hikes, but neither is it obvious that that pause will be followed by cuts. And I think that's a good signal," says Yetsenga.

In New Zealand, where March quarter CPI was 6.7% and June quarter CPI, due out July 19, is expected to be about 6%, Yetsenga says the current inflation rate isn't necessarily the key thing to look at in the inflation fight. On Thursday Statistics NZ said food prices rose 12.5% in the June year, a 35 year high.

"When you've hiked [interest rates] by 400 or 450 basis points, the current inflation rate, yes it's still important, but it's less additive to your information set. What is more additive is can we see the signs that demand and price pass through is being crimped by the policy moves that we have done? And the answer is unambiguously yes," Yetsenga says.

He acknowledges higher interest rates are a blunt tool and may not impact the economy the way we'd ideally like.

"Certainly there are other policy tools available. But in the absence of somebody else stepping up and delivering those other policy tools, it's up to our central banks that have their inflation mandates. And so far I think they're doing a good job at trying to balance getting inflation back to target without crimping the economy too much."

In the podcast Yetsenga also talks about the Reserve Bank of Australia's approach to the inflation fight in comparison to the Reserve Bank of New Zealand, evidence central bank monetary policy is working, whether central banks need more inflation fighting tools, China's "remarkable" 0.0% CPI, and the impact of a higher frequency of extreme weather events on inflation.

"We are talking about deflation there [China]. We need to separate our expectations for China, I think, in the next 20 years [from] what China has looked like in the last 20 years. I don't think those two things will be in any way comparable," says Yetsenga.

Climate challenges, meanwhile, are "a supply side shock which will tend to boost inflation and will tend to worsen incomes. And so it hits productivity as well, and it reduces standards of living."

*You can find all episodes of the Of Interest podcast here.

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Sam Bankman-Fried was a nerdy billionaire and rockstar of the crypto industry, living a lavish lifestyle in the Bahamas, with celebrities advertising his cryptocurrency exchange FTX as he gained influence in Washington DC.

Then it all went wrong. FTX collapsed, leaving an US$8 billion hole and lots of angry customers. FTX was placed in Chapter 11 bankruptcy protection. Worse for Bankman-Fried, he was charged with fraud and extradited to the United States.

He's alleged to have used billions of dollars of FTX customer funds for his personal use, to make investments and millions of dollars of political contributions to federal political candidates and committees, and to repay billions of dollars in loans owed by Alameda Research, a cryptocurrency trading company he also founded.

After being released on a US$250 million bond and placed under house arrest, Bankman-Fried, who has proclaimed his innocence, is now living at his parents' house in California ahead of a trial. 

Speaking in the Of Interest podcast, San Francisco-based Bloomberg crypto, venture capital and startups reporter Hannah Miller, says if you wanted to make a technology company founder as a science experiment, it would be Bankman-Fried. 

Miller hosts, writes and reports on a six-part podcast from Bloomberg and Wondery called Spellcaster: The Fall of Sam Bankman-Fried.

"He [Bankman-Fried] basically grew up on the campus of Stanford University. The big joke is that if you wanted to create the perfect tech founder, he's it. He grew up in Silicon Valley. He grew up in the heart of the tech industry, he was right down the road from some of the people who would actually go on to invest in FTX as venture capitalists," Miller says.

In the Of Interest podcast she talks about how Bankman-Fried embraced effective altruism in his student days at the Massachusetts Institute of Technology, early working experience at Wall Street trading firm Jane Street Capital, and launch of Alameda Research and arbitrage trading of bitcoin between the US and Japan.

Then in 2019 FTX was founded and questions emerged over whether it and Alameda Research were really the separate companies Bankman-Fried claimed they were.

Miller talks about encountering Caroline Ellison, Alameda Research's co-CEO, who had been in a romantic relationship with Bankman-Fried at a mutual friend's bachelorette weekend. She also talks about how big and high profile FTX was at its height, how Bankman-Fried sought to be seen as "the good guy of crypto" in Washington DC, and the company's demise.

"I try to focus on the fact that there are people who trusted their life savings with FTX and now have no idea if they're ever going to get that money back. I think you have to look at the consequences here," Miller says.

"This is someone who really got a lot of people to trust him. And the fact of the matter is FTX is bankrupt and there are people with way more questions than answers."

*You can find all episodes of the Of Interest podcast here.

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The world needs to move to a new economic system where growth is replaced as the ultimate goal by meeting human needs within ecological limits, argues Gaya Herrington.

Speaking in the Of Interest podcastHerrington explains how working at the Dutch central bank, De Nederlandsche Bank, during the Global Financial Crisis led to her realising how interconnected things were.

When subsequently studying sustainability at Harvard University, she decided to revisit the famous 1972 book by a group of Massachusetts Institute of Technology (MIT) researchers, The Limits to Growth for her thesis.

As Herrington, now Vice President for ESG Research at Schneider Electric, puts it, the book; "indicated that our peak welfare levels would be around now, globally. And we would have a choice to maintain it or go down." Her research found we are most closely aligned today with The Limits to Growth authors' business as usual scenario.

"Growing forever on a finite planet is simply not an option," she says.

We don't have a lot of time but do have an opportunity to align ourselves with something like the stabilised world scenario from the MIT team.

How would we do this, what will it mean and can we do it? A new economic system must, first and foremost, replace growth as the ultimate goal with something else.

"I think it should be meeting human needs within ecological limits. That doesn't mean you're anti-growth. If growth then contributes to human wellbeing and can do that with a low environmental impact, we'll still do it and if not we won't bother," says Herrington.

One way or another, she argues, growth will halt.

In the podcast she also talks about what she believes the "very loaded word collapse" would mean, what the world might be like if The Limits to Growth warning had been heeded in the 70s, what system dynamics is, the difference between needs and wants and how this has become muddied, what the role of technology, finance and agriculture could be in a new economic system, how vested interests including billionaires have to give things up, why she sees a significant role for credit unions, whether human nature could allow such change, and whether we will actually make the change.

"I don't know because we've seen in history that it can go either way. I do think that we'll stop growing one way or another. I think what we're seeing already is a destabilisation of the system," Herrington says.

You can find the original The Limits to Growth book here, Herrington's Update to The Limits to Growth here, and her book Five Insights for Avoiding Global Collapse here.

(Note, this podcast was recorded via Zoom. While Gaya comes across clearly, for some reason the start of my questions sometimes doesn't. Apologies for this, we're not sure why it happened).

*You can find all episodes of the Of Interest podcast here.

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If we were building Auckland from a blank canvas with the knowledge we have today there are lots of places where you wouldn't build, says Martin Brook, Associate Professor of Applied Geology at the University of Auckland.

Speaking in the Of Interest podcast, Brook says this year's spate of extreme weather events means we are talking more about the dangers of floods, slips and landslides, but there's a lot of work to do to better prepare ourselves for future such events.

"Generally if we were planning we'd avoid slopes and flood plains and obviously that includes a lot of Auckland. In fact GNS reports in 2009 stated that most of Auckland is at moderate or high risk of landslides...That encompasses a lot of the landscape of Auckland and it would mean that we wouldn't build in a lot of Auckland," says Brook.

"If you look at the Auckland Unitary Plan it doesn't encompass the geomorphology [the study of landforms and landform evolution], if you like, which is the land forms and the earth's surface processes that are currently shaping our landscape."

"I think we build too close to slopes. We love doing that, we cut trees down, we love building mansions on slopes so we have wonderful views. We have a history in New Zealand of building on unstable land, and part of that is the 1981 Local Government Amendment Act which absolved councils of civil liability if they permitted building on unstable land," Brook says.

He says landslides have killed more people in NZ over the last 150 years than earthquakes.

In parts of Auckland Brook says there's a lack of adequate building set-back distances, being the distance between a dwelling and slope or cliff, with set-backs from the bottom of slopes also very important.

Ideally, Brook says, a house on a 30-metre high North Shore cliff should be set-back about 100 metres from the cliff edge.

Brook suggests we have a general issue of politicians not liking to make difficult decisions, but is encouraged by Finance Minister Grant Robertson recently providing risk categories and definitions for properties affected by flooding and cyclones.

"People are talking more about hazards other than earthquakes and volcanic eruptions. Storms do cause floods and landslides and we seem to get them rather often unfortunately. So people are talking about this which I think is great. So let's hope some good does come out of it," says Brook.

In the podcast Brook also talks about managed retreat, places becoming uninsurable, the idea for a national geotechnical control office perhaps within the Earthquake Commission, warning systems and monitoring of moisture levels in slopes, and why he'd prefer "a more holistic storm based approach" than Auckland Council's Making Space for Water initiative.

**And you can find all episodes of the Of Interest podcast here.

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If you're looking for profit-led inflation you should probe consumer facing industries rather than look across the whole economy, says UBS chief economist Paul Donovan.

Speaking in the Of Interest podcast, the London-based Donovan says profit-led inflation, whereby companies are able to expand profit margins and convince customers it's fair to do so, is the third wave of inflation experienced in developed economies since the Covid-19 pandemic. It follows a demand shock as developed country economies reopened and consumers had a "stockpile of savings" they spent on durable goods such as furniture, electronics and cars, and an energy supply shock after Russia invaded Ukraine, energy prices surged and demand reduced.

"What it [profit-led inflation] has really done is prolong the inflation. If we had not had the war in Ukraine I don't think we'd have got the profit-led inflation because Ukraine has been an important part of the story that companies have told to convince people to accept higher prices. I think if we hadn't had the war in Ukraine we would be sitting here talking about falling prices today," Donovan says.

"Right now we're starting to see profit-led inflation be challenged in a number of countries. But I'd say that it has probably accounted for about half of the inflation that we've experienced over the last six-to-eight months."

Lobby group Business NZ issued a report itcommissioned from consultants this week on profit-led inflation, or "greedflation" as it put it, saying it was "an imported narrative not supported by the evidence." Looking at data from 14 industries over the three years to December 2022, the report said 71% of price increases came from input costs, 15% labour costs and 14% gross profit increases.

Donovan says three years is too long of a period to look at for profit-led inflation, and you wouldn't expect to see it across the economy as a whole.

"I think this is one of the problems with a lot of the analysis that we've seen on profit-led inflation. There is this assumption that every company is raising profit margins and that absolutely isn't the case, it's a subset of companies that raise margins. And so if you look at economy-wide data you're going to find less evidence of profit-led inflation," says Donovan.

"In the case of New Zealand, if you're going to get profit-led inflation coming through, you don't look at the entire economy, you look at the consumer facing sectors [such as retail, restaurants, clothing brands or food brands], and see what's happening with margins there. That's the critical story."

In the podcast he also talks about how to spot profit-led inflation, consumers' naive views about what causes inflation, why he doesn't like the greedflation term, why central bankers should talk more about profit-led inflation, why it took off in the wake of Covid-19, and the role of social media.

"Two things made profit-led inflation easier this time. Consumers did have more savings, sort of a windfall of savings during the pandemic. No one's going to describe the pandemic as a lottery win but it was a bit like that. You got a sudden influx of cash that you weren't expecting to have. So that meant that people perhaps became a little bit more indifferent to prices," says Donovan.

*Donovan published a report on profit-led inflation earlier this year which we covered here.
 *And you can find all episodes of the Of Interest podcast here.

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