graeme wheeler : central banking in a post - crisis world speech by mr graeme wheeler, governor of the reserve bank of new zealand, to the admirals ’ breakfast club, auckland, 26 october 2012. * ( i ) * * new zealand ’ s vulnerability in international markets in “ les miserables ”, victor hugo wrote of the vulnerability of a little black cat. “ we all know the habit of cats of hesitating in an open doorway – hovering uncertainly at the risk of being crushed by the closing of the door. ” new zealand shares this sense of vulnerability. we are a small economy – around four and a half million people in a world of seven billion, producing output roughly three - quarters of that of queensland. our vulnerability is increased by our habit of not saving enough for our investment needs, resulting in a large accumulation of foreign debt. yet, we face the world with tremendous assets. the world bank suggests that on a per capita basis, new zealand is ranked eighth for natural capital ( pastoral and crop land, forest resources and subsoil etc ) with only oil producing countries ahead of it. we lead the world in renewable natural resource related capital. oecd comparisons of high school student attainment place us seventh among 71 countries. transparency international considers new zealand the least corrupt country in the world, and the world economic forum ranks new zealand among the best for the quality of its institutions, and the efficiency of its product markets and its financial markets. with these assets we should be capable of stronger economic growth. internationally, and particularly in smaller economies, economic growth is driven by the private sector and its ability to compete on global markets. we need to reverse the slowdown in multifactor productivity growth since 2005 and the decline in value added in our tradables sector. and we need to reverse the shift of resources into the public sector and other non - traded activities. our economy is continually buffeted by external shocks. some are natural events, like the catastrophic series of christchurch earthquakes that represent the sixth largest global insurance payout ever. others reflect tectonic shifts in the global economy. these include the rapidly growing importance of east and south asia in international trade and investment, the rising global demand for commodities, and the changing global saving and investment patterns associated with the expanding middle class in developing economies and demographic aging in the western economies and japan. the integration of financial markets, reduction in trade barriers, and global diffusion of skill enhancing technologies, and especially information technologies, mean that

economic shocks are transmitted more rapidly across the globe and business cycles become more synchronised. overlaying these structural shifts are enormous economic adjustments flowing from the global financial crisis. household balance sheets, especially for the lower and middle income classes, have been severely damaged in the us and large parts of western europe. this process of deleveraging debt and rebuilding wealth is likely to take several more years. for example, the federal reserve reports that median real net household wealth in the u. s. fell 39 percent from 2007 to 2010 to levels last seen in 1992. in 2011, the median real level of us household income dropped to its lowest level since 1995. in many countries, the banking and commercial real estate sectors are still contracting, and the indebtedness of the banking sector in the euro area remains very high. tensions remain around large current account imbalances, exchange rate pressures, slow growth, and high unemployment. across much of the developed world, as in new zealand, real incomes per capita have yet to recover to 2007 levels. bis central bankers ’ speeches the world is very different from the heady days of 2003 – 2007 when the global economy grew at its fastest rate in four decades and international fora debated whether the growth dynamics of the emerging economies were becoming decoupled from the industrialised world. no - one believed that the banking system could fail in a g7 economy – let alone a group of g7 economies. nor did they contemplate how rapidly fiscal positions could be overwhelmed by lower tax revenues and pressures on governments to become investors and guarantors of last resort – in areas well beyond their traditional investor habitat and risk tolerance. we are in new territory for central banking. for the past three to four years policy rates in the u. s., the euro area and in many other countries have been at historic lows, some short - term government securities markets are returning negative yields, and the bank of international settlements reports that the volume of central bank assets in the advanced countries – itself largely a result of massive liquidity injections – expanded to 25 % of gdp, double the ratio of 2007. forward curves and forward guidance by the major central banks suggest that interest rates will remain at historic lows for at least another two to three years. these policy settings are unprecedented. the challenge will be to transition to more normal monetary conditions before high rates of inflation and widespread escalation in asset prices are generated. we have already seen bull markets in commodities