Finance Minister Grant Robertson has ruled out writing off Government debt, while the Reserve Bank (RBNZ) has said it doesn’t expect it to be written off.
Robertson made the call during question time in Parliament on Wednesday, initially saying writing off Government debt wasn’t his “intention”, before finally conceding to National’s finance spokesperson Paul Goldsmith that he would rule it out.
Much of the debt the Government is taking out to pay for the Covid-19 response is sitting on the Reserve Bank’s balance sheet.
Treasury is issuing debt in the form of New Zealand Government Bonds. Investors are buying these bonds. The Reserve Bank (RBNZ), through its quantitative easing (QE) or Large-Scale Asset Purchase (LSAP) programme, is then buying these bonds from the investors. It’s doing so to push interest rates down to help it achieve its inflation and employment targets, and also to provide liquidity in the market.
To date, the RBNZ has bought $26 billion of New Zealand Government Bonds. Its current commitment is that it will buy up to $100 billion, ensuring it doesn’t end up owning more than 60% of the outstanding New Zealand Government Bonds on issue.
Theoretically, this debt, which the RBNZ treats as an asset, could be written off.
Asked by interest.co.nz to detail exactly how this would be done and what the consequences would be, an RBNZ spokesperson provided a brief statement: “The Reserve Bank does not expect this debt to be written off.
“Central banks globally have purchased government bonds as part of large-scale asset purchase programmes because they are the highest quality asset in the financial system.
“The bonds are backed by the Government’s unique ability to gather future taxes, which in turn is backed by the ability of the economy to produce goods and services and generate income in the future.”
Goldsmith confirmed to interest.co.nz he too would rule out writing off Government debt.
“Simply because orthodox economic policy has always been that if you borrow money, you need to pay it back,” he said.
“Countries that default on debt have been punished by international markets and rightly so.
“I was glad the Minister of Finance confirmed that’s the Government’s policy as well, and his policy.”
Here’s a transcript of the exchange between Robertson and Goldsmith:
Goldsmith: Does he agree that Government debt eventually needs to be paid back?
Robertson: Well, Government debt does need to be paid down. It's very rare in New Zealand's history for us to have got to the point where we had almost no public debt. I believe Sir Michael Cullen got us, in terms of as a percentage of GDP, as close as we've got in history. But we have to manage debt carefully—for example, the record of this Government speaks to that: the fact that we inherited 21.7 percent net debt and we reduced that to under 20 percent.
Goldsmith: Will he rule out cancelling or writing off any of the Government debt that has been bought by the Reserve Bank, as long as he is the Minister of Finance?
Robertson: That is definitely not my intention.
Goldsmith: Rather than his intention—
Speaker: Order! Order! I am going to ask the member to answer the question again because, I mean, there's no requirement for yes/no answers, but that answer could have been taken either as a positive or a negative response to the question.
Robertson: No.
Speaker: That's much clearer.
Goldsmith: Sorry, so he won't rule out cancelling or writing off any Government debt that has been bought by the Reserve Bank? Is that his answer?
Robertson: It is not my intention to write off any of that debt.
Goldsmith: Just clarifying: rather than his intentions, will he rule out cancelling or writing off any Government debt that has been bought by the Reserve Bank, as long as he is the Minister of Finance?
Robertson: I am ruling that out, yes.
Modern Monetary Theorists are among those who believe government debt can be written off in some instances. For more on the pros and cons of this, and for Robertson's response to this school of thought more generally, see this story written earlier in the month.
52 Comments
Theoretically, this debt, which the RBNZ treats as an asset, could be written off.
The RBNZ would have to call upon government to retire/liquidate the debt (asset) in its possession to pay down the liability to the banks which was printed out of thin air to purchase said debt from them.
That's why the LSAP (QE) purchased government debt has to remain on the RBNZ's books until sold back into the market place or redeemed at maturity.
It doesn't have to pay them back at all. If the RB just cancelled the assets, banks would run minimum reserve levels. If the RB lowered reserve requirements, banks would just swap reserves for CP, or gold or hard currency, or whatever, and let some other poor sod hold them. It probably would get velocity up quite a bit to say the least. But they don't have to pay it back to the banks.
End of the day, reserves are just a legal requirement and have to be met. If the RBNZ cancels assets, banks still have to hold reserves and don't have a say in the minimum levels or costs.
When the general masses realise there's no value in money, they'll all go back to the barter system.
Interestingly, a good friend on mine has family back in the Cook Islands which are not complaining about the lack of tourists. They have reverted back to the good old days of bartering, trading fish for vegetables etc. There's less pollution, more food and a better sense of community. Just imagine that.
What you can take from this is the money system has been designed to centralise control, and benefit the few; who are not benefiting themselves now either. I was reminded of this fact how well the barter system works when we put out feijoas on the roadside for donations only during lockdown, to be rewarded with a bag of kiwifruit being left on our doorway.
Might be time to leave the current monetary system to rot, and go back to basics.
I agree the barter system has merits BUT what happens when you have nothing other than your time to trade and no one needs a job done they can't do themselves? Also who sets the value of goods bartered? That's why money was invented, so people could trade on a more level footing and prevent land owners cornering and thus manipulating the supply of goods.
Oh surely you know the answer to this question - "who sets the value of goods bartered?"?! The buyer and the seller set the value. The barter system is a market at its most basic. It only gets screwed up when outsiders step in and try to dictate things like values and so on, or individuals try to rule over others.
Agree in principle, but human progress is through technology, innovation and finally infrastructure. Leveraging what we can do intellectually, compared with what we can physically barter, leaves no comparison. Currency facilitates the bartering of goods; it standardizes the unit of barter, which allows more barter to occur.
To address the point of money benefitting the few, I'd wonder more about who pays the pensioners term deposit? It's not the bank, it's the guy paying his mortgage.
Extending that to commercial property even, commercial property investors are financing undercapitalized businesses by providing the physical space. Don't believe it? Try start a business and buy a warehouse at the same time. Capital costs money, it is more productive for business net profits and growth to rent. The mechanics of carry drive an economy.
It's the majority that benefit, but people see capital gains and want to tear it down, it's distorted thinking. Capital gains are simply speculation, and are too much risk for a regular business to handle on their balance sheet, as well as the uncertainty. There is nothing sinister about capital gains, it is just envy.
Uncertainty and worry however, are tangible, tradable goods that are bought and sold every day. Property is included in that process, as are many other goods. Someone has to hold an asset through a depression, do you want to?
The thing is, when currency is introduced then you are moving away from a barter economy. And modern banks have for at least a couple of centuries now, moved away from the original concept and have become essentially a rip off of the ordinary working man. But they are working in collusion with Governments to ensure ordinary people are forced to deal with them. A true barter economy means the banks cannot be in the loop. Introduce money and then they must be involved in some way.
In our modern society yes pensioners are victims of the modern monetary systems, and vulnerable. Capital gains are simply and indicator of where a Government has failed in its role to regulate the economy to benefit ALL people not just a few. I own one house, the house I live in. Any capital gain there has been on it is meaningless to me as i have no intention to sell it. I am not a speculator or investor, but there are some even on this forum who will argue that because I am a boomer, and I own my own house, I should be taxed on what they perceive to be its value. Just jealousy!
Human progress is very questionable, when you consider the byproducts we are leaving in our wake. More pollution, and extinction of other species which have contributed to a sustainable ecosystem doesnt sound like progress to me.
Some humans are in too much of a hurry, and tend to progress at the expense of the wider community. Whats wrong with organic growth, rather than including banksters in the mix; whos only objective is more profit. They dont care for the wider community, and thats seen in our the unsustainable high costs of accommodation (a byproduct of unsustainable loans) they have facilitated; not too mention the populated waterways they also facilitated with farming intensification, leading to the few controlling more.
I'd personally like to see the end of speculation and the banksters that facilitate this. Who needs peaks and troughs facilitated by banksters, when its much easier to run a business and economy steady as she goes. Sustainable growth is what most of us are after; rather than booms and busts, and the best approach to this is organically.
Monetarism has been the dominant philosophy of the last several decades and that has gotten us to where we are today with near zero interest rates and sky high household debt and yet even now economists and politicians still think that the cure is just for more of the same.
RBNZ - "The bonds sit on the RBNZ balance sheet until either, 1. They mature, or 2. They are on sold."
Banks need to be in receipt of the debt redemption proceeds to extinguish the deposits they extended to the government when the bonds were initially monetised in the public banking system.
what is to stop a government requiring the RBNZ to pay a large dividend and using that to pay down the debt.it has been done before by previous governments of both sides with SOE, whom had to take on debt to service
http://www.stuff.co.nz/southland-times/business/8413716/Government-defe…
SOEs were created for potential mass privitisation, which never happened to the degree envisaged - they are independent legal entities which the government is the sole or partial shareholder together with others. Under the original legislation they were not to be in receipt of a state bailout.
Seams like a money go round to me. The Treasury pays interest to the debt holder (RBNZ). What does the RBNZ so with the interest? I imagine they "gift" it back to the treasury.
Default or no default really makes no difference. The RBNZ is essentially an arm of the NZ govt anyway. Its basically like giving a loan to yourself & then paying interest on the loan to yourself
Seams like a money go round to me. The Treasury pays interest to the debt holder (RBNZ). What does the RBNZ so with the interest? I imagine they "gift" it back to the treasury.
RBNZ has to pay OCR to the banks in respect of their excess settlement cash positions, created to purchase the bonds.
Yeah, it's govt spending + rbnz purchases. Reserves come in the back door after that.
RB can just generate reserves buy buying hard currencies. Not rocket science.
Banks don't create reserves by lending their own cash, they have to go to find them, and if Govt's aren't spending, i.e surplus, then reserves are scarce, and lending slows.
Etc etc.
Theoretically is a waste of time - the question is whether materially (i.e., by growing consumption of goods and services and thereby increasing government income by way of taxes) can this debt ever be repaid?
So, if we can't write off the RBNZ debt - let's instead write off the student debt :-). No intermediaries, no problem.
Theoretically is a waste of time - the question is whether materially (i.e., by growing consumption of goods and services and thereby increasing government income by way of taxes) can this debt ever be repaid?
It is raised in good faith that it can be refinanced, if not totally extinguished by tax sourced redemption proceeds. It will be obvious to one and all when this a prohibitive option. We will be begging at the IMF's doorstep.
"can this debt ever be repaid?"
Overtime they expect to inflate the debt away, which is the invisible tax on cash holders and long term debt holders.
Indicated by the fed https://tradingeconomics.com/united-states/interest-rate
It matters in fact it matters a lot. If you look at countries that have totally lost control of their economies and the currency becomes worthless your in deep trouble. It's about maintaining confidence in the currency and not being stupid or it all goes to hell in a handbasket.
All the usual micro and macro economic, monetary and fiscal theories and practices have been made redundant and useless in the new normal world, where no one knows what is happening, what is coming and what will be the consequences of any act by the government and the Treasury. Everyone is groping in the dark. It will take another 10 years or so to find out what it is all about and formulate new theories and policies.
My favourite quote : An Economist is one who sees something work in practice and then goes on to find out whether it will work in theory also.
We've relied on those massive increases in household debt over the last decade, to record levels. Now we're also needing massive increases in government debt.
Sounds like we've just been living beyond our means, financially as well as ecologically. Ah well, as long as we can put off the negatives to be borne by next generations all should be right.
Just asking the question is political theatre - "It will have to be paid back, which can only be done through higher taxes or economic growth. Do you trust Labour to grow the economy or keep loading more and more costs onto businesses? Or will they just raise taxes? Or both?" etc. It doesn't really prove anything at all other creating a few soundbites for campaign videos.
Carlos67 - Up until recently I would have agree with you but realize that nothing remains the same nor does monetary thinking. Going by the past 30-40 years today could be viewed a mess. MMT is fascinating. I see it like this, back in the day when money was pegged to gold we had a fixed amount of money in the system like the game monopoly. In that game there can be only one winner, if MMT was applied to it everyone could winner to differing levels. When Governments run surpluses the economy runs deficits and vise versa. NZ has been running our economy to cold with tight monetary control. Just like we run trade deficits that no one cares about any more we could have been running small Government Deficits and running hotter. In the future that debt probably around the world will be altered at the stroke of a pen as long as it is in NZ dollars for use. Things are changing, sometimes its hard to see why but at the end of the day I believe it is possible to enhance all our lives QE to date around supporting Covid 19 is an example.
Carlos67 - Up until recently I would have agree with you but realize that nothing remains the same nor does monetary thinking. Going by the past 30-40 years today could be viewed a mess. MMT is fascinating. I see it like this, back in the day when money was pegged to gold we had a fixed amount of money in the system like the game monopoly. In that game there can be only one winner, if MMT was applied to it everyone could winner to differing levels. When Governments run surpluses the economy runs deficits and vise versa. NZ has been running our economy to cold with tight monetary control. Just like we run trade deficits that no one cares about any more we could have been running small Government Deficits and running hotter. In the future that debt probably around the world will be altered at the stroke of a pen as long as it is in NZ dollars for use. Things are changing, sometimes its hard to see why but at the end of the day I believe it is possible to enhance all our lives QE to date around supporting Covid 19 is an example.
More on MMT from Naked capitalism https://www.nakedcapitalism.com/2020/08/how-do-banks-create-money.html
With so many businesses eschewing workers in favour of robots, governments are trying to do the same. MMT seems that it is the idea that productivity is linked to a computers ability to print money, rather than the indexed value of employment outcomes measured by the size of a nation's middle class. Whatever economic system comes next is going to have to reconcile these factors in order to be truly successful for everyone, rather than just the elite.
Ultimately this is a debate, and issue around the difference between being a currency issuer and a currency user and the purpose and point of taxes.
It is clear that as yet at the higher levels of Government that there is still considerable entrenchment in the old models of thinking. This is concerning as viewing all the spending through the COVID support packages as debt will place a significant burden on future tax payers that may never be able to be paid off, without impoverishing the majority of the population.
I cannot see the wealthy in this country picking up the burden to support the Government, rather they would lobby the Government to lay off them, leaving only the rank and file population to carry the burden. A load that may be just too great to bear.
Steve Keen and Phil Dobbie: Can Modern Monetary Theory solve the Covid19 debt problem?
What problem? "It's a myth that the deficit matters; what matters is the state of the economy ... and the state of the ecology as well."
https://www.youtube.com/watch?v=xmar3tSvIOo&feature=youtu.be
Historically our governments have been fixated on running budget surpluses and this is what has lead to our low levels of savings and high levels of household debt. As sectoral balances explains, a government surplus must be equal to a private sector deficit.
As long as NZ runs current account deficits and we also wish to have money to save then the government must run budget deficits and in so doing be creating more money through its spending than it is taxing back again and cancelling.
Government debt is a measure of the NZ Dollars that the foreign sector holds in its trading with us and it is also the money that we hold as our savings.
https://gimms.org.uk/fact-sheets/sectoral-balances/
Except that our Government sees the 'debt' as something that must be paid back and the only way to do that is by levying taxes. Currently their view of the 'debt' places a burden on future tax payers that carries the risk of impoverishing most of the population, unless the Government starts regulating the high end behaviours that rip most people off.
They can't tax the money held by the foreign sector though as they are not residents. What we normally do is sell them some of our assets I suspect but which just makes our current account deficit even worse in the long run.
Taxes should be levied on those who accumulate the most of the governments money and not through austerity driven spending cuts as is done at the moment which only exacerbate poverty.
The terms debt and borrowing are all part of the neo-liberal narrative to have us believe that the government is just the same as a household which must raise revenue before it can spend.
"Treasury is issuing debt in the form of New Zealand Government Bonds. Investors are buying these bonds. The Reserve Bank (RBNZ), through its quantitative easing (QE) or Large-Scale Asset Purchase (LSAP) programme, is then buying these bonds from the investors. It’s doing so to push interest rates down to help it achieve its inflation and employment targets, and also to provide liquidity in the market."
Jenée, would you please mind explaining to me:
- 1) Why can't the RBNZ buy these bonds straight from the Treasury?
- 2) Who are the investors who buy then on-sell the bonds, retail banks only?
- 3) What's in it for the investors buying and on-selling these bonds.
Many thanks
You may find this article by economist Bill Mitchell titled Why Do Currency Issuing Governments issue Debt helpful.
Part one. http://bilbo.economicoutlook.net/blog/?p=45106
Part two. http://bilbo.economicoutlook.net/blog/?p=45108
It's all just terminology, nothing is really written off, it's just a matter of in whose account the money is held and in what form, the Reserve Bank in the form of bonds or the trading banks accounts as currency reserves. The money still exists, only taxation can extinguish it. Treasury and the RBNZ are both part of government, it makes no difference who the "debt" is assigned to.
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