Finance Minister Grant Robertson isn’t keen to take efforts to cushion the blow of COVID-19 in a new direction by enabling the Reserve Bank (RBNZ) to print money to pay for specific government policies.
He said it was important for fiscal and monetary policy to work together.
“We’ve certainly made a virtue over the last couple of months of closely coordinating our actions together,” he said.
“But there’s a difference between fiscal and monetary policy - it’s the government’s role to manage fiscal policy and that’s how I’d like to see it continue.”
Asked what it would take for him to change the RBNZ’s mandate for it to print money for fiscal policy, rather than monetary policy purposes, Robertson responded: “It’s just not my intention, Jenée, to do that.”
The RBNZ is currently printing money for monetary policy reasons. It has committed to buying up to $60 billion of New Zealand Government Bonds on the secondary market over the next year. Importantly, the purpose of this is to lower interest rates and encourage growth to help the RBNZ meet its inflation and employment targets.
Nonetheless, RBNZ Governor Adrian Orr recently told interest.co.nz he wasn’t completely opposed to the RBNZ buying bonds direct from Treasury to help finance government policies, although he considered it unnecessary with the market functioning well.
He said it would be “achievable” if done transparently, for the right purpose and with the right structures in place.
Orr said there was no “right or wrong”, but cautioned, “You could take it to the extreme immediately and you’ve gone back in time 30, 40 years and the central bank is being used as the ATM for a government and it’s unclear whether we can control inflation anymore, and it’s back in the hands of the elected officials…
“It’s not for me to choose the policy. I would implement the policy, but I would be extremely cautious about making sure the risks are understood, managed and mitigated wherever they could be…
“People are very passionate about the structures that have been built and you don’t muck around with them lightly.”
When interest.co.nz again pushed Robertson on the issue from a different angle, asking him whether the helicopter money Treasury was looking at would involve the RBNZ giving people cash payments, or the government borrowing to do so itself (as it is with all its other relief policies), Robertson said: “We’re not at the stage of even having that discussion.
“The concept of those sorts of payments has been discussed, but it’s not something that has got to that level of discussion at all.”
National’s finance spokesperson Paul Goldsmith was unenthused by the concept of direct financing.
“We’d want to see a clear, well-reasoned policy statement from the Reserve Bank on this, then we could make an assessment on it. Right now, the suggestion that we would take an extra step for the Reserve Bank to be directly funding fiscal policy - we’d be far from that,” he said.
“It’s a very significant step to take and it requires clear policy justification for it. And the obvious risk is that if there’s a sort of sense that somehow money can be created and there’s no pain, then it could make the government even less disciplined than it otherwise would be.”
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47 Comments
Oh please. This is disingenuous stuff. The government deficit spending, issuing bonds on the primary market and then the RB buying them up on the secondary market is equivalent to the RB buying up the bonds directly from treasury, except that some ticket clipping and easy profits is going on for those that buy the bonds on the primary market. One pocket of government (Treasury) owes the other (RB). Why all this smoke and mirrors? We aren't stupid. I doubt the QE will ever be uneased. It wasn't anywhere else. And the idea the RB can control inflation - well it never did very well at reaching its target did it since the GFC. Inflation occurs in the real economy when spending out does supply and capacity. Not cause of interest rates per se whose effects are pretty marginal.
is it not paid back to the government as a dividend on the profit the RB makes
https://www.interest.co.nz/banking/96864/rbnz-payer-chunky-dividends-go…
" paid a $430 million annual dividend"
Seems to me that there is a distinction between govt spending/borrowing to replace funds lost to the entire economy during lockdown as opposed to spending/borrowing during a normal course of events. During lockdown the available finance to business and wage earners fell down a hole; thus reducing demand in the economy going forward. I would be happy with Govt working with the RB to replace that liquidity in the wider economy WITHOUT placing a burden on future tax payers or meaning austerity on future Govt spending. It would not lead to increased demand hence inflation. It should though be limited to lockdown connected losses, like Councils losses which are going to result in rate rises and or job losses. Whils post Covid gains are going to be driven by small business, we are a long way from that. Govt spending is going to lead the recovery over the next 2 years, and it is going to need some bold steps. Borrowing could be used for additional infrastructure spend, but I believe immidiate response stuff like wage subsidy, loss carry back and lockdown council replacement grants should be payed by RB
The problem with the argument above is that there was reduced output during lock-down. Treasury and RB cannot "replace" lost output. The suggestion above is to increase money supply to offset that lost output. Because Treasury and RB cannot increase output, NZ's aggregate output for 2020 is stuck with the negative shock from March-April 2020. What's being proposed is to create more money supply that will be chasing a reduced aggregate quantity of output. If history is any guide, the resulting inflation will be hidden in asset price inflation that's not measured by CPI. This is smoke and mirrors that reduce real wages (for all but those holding the kind of assets that Treasury and RB influence upward).
Well my first reaction is on reading was ................Good to hear this ...........just leaves me wondering how we are going to pay for all the spend-up .
On second thought , they are already buying Bonds in the secondary market , which is pumping cash into the economy ......... Thats like having someone fill the ATM for you and then you secretly draw it out at night using someone else to do it for you
Which suggests to me we are being mushroomed ..............kept in the dark and fed bullshit ..
And lest we forget , Fiscal policy and Monetary Policy are travellers in the same bus , and while they are not big mates as co-travellers , they have the same broad objectives............so Robertson who is clearly the one who has motion sickness on the bus, is being a little disingenuous suggesting they are not working in tandem right now
Well we are possibly in a delfationary cycle , so one could argue that so called " easing "......... and to quote Shakepeare......... this rose's other name is "Money printing " may not have an undesired effect .
That said , a rose by another name , is still a rose , looks good and smells nice for a while but also comes with thorns
Orr's comments are deeply disturbing. I remember the NZ school curriculum at year 10. By that age, we knew that what Mr Orr is proposing has lead to the ruin out of countless societies. But apparently our RB governor doesn't understand even basic economics.
If the NZ population loses faith in the ability of our government to pay back its debt, the solution is not to print money and rob us of our wealth accumulated over time. The solution is that interest rates need to rise to reflect the real level of risk. But Mr Orr is a bullying nutjob, so we have to contend with his megalomania.
If we had more competent people in government rather than profligate spenders violating the rule that 'government shouldn't pick winners', then NZD might be trading at parity with EUR and USD. Given that imports are a share of all NZers' consumption, weakening the NZD is another way to hide inflation and lower our standard of living. Part of government not picking winners is not picking exporters over importers. Sacrificing the NZD is a real wage cut for all NZers who don't hold foreign-FX-denominated assets or own export businesses. The workers in our export industries will be busy and keep their jobs, but their real wages will decline.
The game plan here (and in most other countries to be fair) is very obvious...govt has made a plan to default on their debt as they know there's not a chance in hell that it will ever be repaid. So the gullible bondholders will be fleeced and countless pension funds will go up in smoke. They just hope that the sheep are buried deep enough in their social media fantasy worlds to not notice....
Well if the bondholder is the government itself in the form of the RBNZ it doesn't really matter if the debt is quietly written off does it? Makes no difference to any pensioner or investor. As long as inflation is stable, who cares? See Japan. Been doing it for years.
I hope people see how stupid it is to pretend the exact govt debt number matters. What matters is: is fiscal policy sufficiently directing the resources of our economy to good uses? Is it sufficiently counter-cyclical to plug the hole we find ourselves in when crises hit? Design policy around real people and resource constraints - tell the RBNZ to do whatever it takes to achieve your public policy aims.
None of the countries that you mention are sovereign currency issuers, they all borrow in foreign currencies. The NZ government though is a sovereign currency issuer as acknowledged in this article by economist Dr Steven Hail. https://independentaustralia.net/politics/politics-display/modern-monet…
Very true, but Russia 1998. They were on the ruble and defaulted on domestic debt.
But the real issue is that debt is not entirely consequence free, no matter how you cut it. Some of the problems include;
1. You don't really know when investors will simply stop buying your sovereign debt. It might be when you least expect it and are least ready to deal with that. If you have become accustomed to live on a diet of unlimited debt it can be very hard to cut costs at short notice. Sometimes political pressures at that minute tempt governments into money printing to keep the ball rolling with poor outcomes following.
2. Another problem with sovereign debt is the example of the USA, where over time the creation of debt has less and less economic effect in anything real or useful. Like creating jobs for example. Unemployment remained stubbornly high for long periods in the US while debt was soaring ever higher.
3. A third issue is that every dollar that gets sucked into your government bonds is an investment dollar sucked out of doing anything useful in the economy. It would be ideal if you get foreigners to take it all of course.
4. Another issue is that interest payments create an upper limit on the merry go round that often leads to higher tax and poverty rates in the long run. That can mean decades later, of course, but again, like most addictions, it is much easy to start and rationalise away than stop. A debt habit is no exception.
"Very true, but Russia 1998. They were on the ruble and defaulted on domestic debt."
It is interesting the conditions that led to that.
Japanese government's debt to GDP is currently over 200%, (higher than Russia's at the time of their default)
https://www.ceicdata.com/en/indicator/japan/government-debt--of-nominal…
One of the interesting aspects of this debt debate is the uncertainty.
One group argue there will be no material consequence and (to me anyway) seem to justify that stance by pointing to the lack of actual consequences, the US being the biggest elephant.
Another group argue nothing is free and one day there will be consequences, it is just a matter of timing.
Empirical evidence sure does show that some governments can run public debts of truly prodigious dollar size for very long periods of time. Although it does seem they are not entirely consequence free. The lack of positive impact on real economy problems, like unemployment being one.
how Argentine and Turkey are not sovereign currency issuer? Most of Turkey foreign debt is by its private sector (very similar to NZ) not by its government. Argentina is different with government and central bank owning most of foreign debt, but surely they are also issuer of sovereign debt?
Well said Skywalker 77. I say cut out the QE middleman and directly fund the fiscal policy via overt monetary finance. Then we can all stop worrying about the debt to gdp ratio which doesn't matter in a sovereign currency nation - just make sure the spending is judicious and not so much to outstrip capacity to respond. We are in deflationary times. We need to sustain people's incomes to keep the circular flow flowing as it were. Bond vigilantes have power in eurozone countries and countries that need to borrow in foreign currency. Not in NZ. Here the RB can use OMF or buy up any debt the bond vigilantes don't want. The RB can always control the yields if it wants to. NZ never need default. If we do see harmful inflation, pull back on the G-T and do a bit more T and less G. Have I mentioned that it is not rocket science.
This could have worked in an economy that all the inputs and outputs of it were paid in that currency. NZ is a resource poor, environmentally conscious country that relies on trading with the rest of the world for most things it want (some being essential inputs for its export goods and services). While in relative value these are not significant to NZ total GDP, they are essential as they are the load bearing pillars that everything else is built upon. weaken the pillars and the whole building collapse.
In an ever expanding local currency scenario, why any export earner should change its foreign currency to ever depreciating NZD (they have to convert to an extent to meet their obligations, but they will 1) delay this as long as possible (which improves the exchange rate in their favor) 2) keep profits/cash surpluses in foreign currency).
Your system only partially works for US as their currency is the currency of trade. Ours is not
NZ seems to be joining the global club of creating liquidity through QE. The idea that this debt will "melt away" has no validity in a "Stagnating" environment. In 10 years the debt will probably be greater in real terms!! The experience is that once you turn the tap on it becomes impossible to stop.
The new global order would seem to be that if we all hold hands and create liquidity together that somehow we will be ok. The two great perils are a sudden loss of confidence in the bond market or hyper-inflation. Trying to stop hyper-inflation abruptly would almost certainly tip the world into a major recession.
The RBNZ is currently printing money for monetary policy reasons. It has committed to buying up to $60 billion of New Zealand Government Bonds on the secondary market over the next year.
Ok Jenee can you please ask Mr. Orr, or explain, where the RBNZ get the $60 billion from?
I am interested in the topic and have a basic understanding, but no expert, so please bear with me!
I had someone reference Michael Joseph Savage and the creation of State houses by "creating" money within NZ at no interest. Is this correct and is this similar to what Adrian Orr is talking about?
Thanks for any response. I'd like to understand the subject more and I think all people should show an interest, decisions made have huge impacts on all of us.
"Princes of the Yen" by Richard Werner seems pretty relevant. RBNZ buying bonds from treasury is exactly what should be happening. That is to say if the government has a clear plan for total resource mobilisation, and reworking incentive structures to achieve maximum employment and increased productivity.
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