Finance Minister Grant Robertson maintains now is a good time to talk about whether the country’s monetary policy model is fit for purpose.
However, Modern Monetary Theory (MMT) is "not something" he's "looking to take up".
Speaking to interest.co.nz, Robertson said he had received a lot of correspondence from people advocating for him to reframe his thinking around debt.
Yet he was “satisfied we’ve got the environment we need”.
He acknowledged his pre-Covid target of reducing net core Crown debt to 20% of Gross Domestic Product (GDP) was “arbitrary”.
However he said, “I do think managing and controlling debt is important.”
Asked whether the government’s long-term goal should ultimately be keeping debt at a low level, Robertson said: “I think it’s good for New Zealand to do that. But we can do that in such a way that continues to support social programmes and continues to support significant infrastructure investment, which we’ve done.”
When Robertson last month said he was putting away $14 billion of the $20 billion allocated in the May Budget towards yet-to-be-determined Covid-related expenditure, he ruled out universal cash payments, or helicopter money, pre-election.
MMT explained
Coming back to MMT, it's a school of thought that argues governments don’t need to be constrained by debt in the same way households do.
Countries that issue their own currency and don’t have significant foreign debt can technically print money and never become insolvent in their own currency.
The argument in New Zealand’s context is that Treasury could effectively take out an overdraft from the Reserve Bank (RBNZ) to get cash to inject directly into the economy via helicopter money for example.
The RBNZ could then write off the debt to avoid burdening future generations with government spending cuts and/or tax hikes.
Inflation is of course a key risk of money creation longer term. The MMT solution is for the government to respond by removing cash from the system once the economy has returned to full employment by increasing taxes.
However political risk remains. What’s to say a government, in cahoots with a central bank, won’t go overboard with the money printing, or later find it too politically unpalatable to increase taxes to curb inflation?
Another risk is that the RBNZ writing off debt owed by the Treasury could upset credit rating agencies, devalue the currency, and create uncertainty in financial markets.
Rather than focus on debt targets, MMT advocates say governments should focus on what spending is necessary and can be absorbed in an economy. IE how much a government could realistically invest in new infrastructure given labour supply, availability of building materials, and other resources.
They point out governments spend before taxing and borrowing, rather than the other way around. For more on MMT, see this article.
Is monetary policy fit for purpose?
With central banks opening their monetary policy taps to the max with quantitative easing, and governments splashing cash to keep their economies afloat in the face of Covid-19, MMT has come under the spotlight.
The RBNZ has committed to buying up to $60 billion of New Zealand Government Bonds from banks, fund managers and other investors. While this creates liquidity in financial markets, it doesn’t directly give the government money to fund its deficit. And once the bonds mature, Treasury will have to repay the RBNZ.
“In terms of monetary policy at large, I think this is the time to be talking about; is it fit for purpose for where we are? Which is exactly the conversation happening all around the world. Does that necessarily translate into MMT? No," Robertson said.
He said he still thought targeting inflation was an important part of monetary policy.
Asked whether he was worried about quantitative easing (which lowers interest rates) causing major house and equity price inflation as it did after the 2008 Global Financial Crisis, Robertson said: “I wouldn’t say it worries me.
“It is one of the conundrums of the situation that we find ourselves in.
“The housing market has held up significantly more than people forecast it would in these circumstances. We clearly keep an eye on asset prices, and the last thing I want is for New Zealand to go through what is has in the past, which is significant bubbles.”
Greens open-minded
Green Party co-leader, James Shaw, is concerned about quantitative easing causing asset price inflation and thus inequality.
He recently argued this underlined the need for the government to respond by rejigging the tax system. The Green Party is campaigning on introducing a wealth tax of 1% applicable to net wealth over $1 million, as well as two new top tax brackets for income over $100,000 per annum.
Shaw has spoken out against austerity, but won’t go so far as to support MMT.
“It is obviously risky when you consider models like that. But I think it’s worth investigating with every other option we’ve got on the table,” he said.
“Central banks all over the world are looking at this as an option - and their other options - because the sheer scale of all the liquidity that we’re having to pump into the global economy right now is colossal. And so, you do need to consider your options.
“New Zealand has a pretty good tradition of managing itself responsibly and in concert with other countries.”
National is campaigning on reducing net core Crown debt to 30% of GDP within the next 10 years or so. Treasury in May forecast New Zealand’s net core Crown debt to GDP reaching 54% by 2023 - an increase from 19% in 2019.
Meanwhile ACT is campaigning on returning the Government’s books to surplus by 2024. Treasury in May forecast a $4.9 billion in deficit at this point.
*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.
57 Comments
Yep. What's even better is now we've got the huge increase in Govt debt with none of the promised infrastructure to show for it, which Joe Taxpayer Esq has to repay in addition to their own student loans, crippling mortgage payments or rents inflated to maintain yields on stratospheric asset prices.
Lets keep moving. (Sideways, slowly, backwards, doesn't really matter)
(Apologies to first commenter, accidentally reported your comment. Mods, would love it if you could add a confirm button for reporting a comment please. Too many times now, go to click reply and the webpage jumps as something else loads and I end up clicking something else).
A very simple improvement for the Report Comment misclicks would be to put it on the far right of the section, so it's not next to the Reply button. Might possibly get people clicking Report instead of thumbs up by mistake, but it's probably an improvement I'd think.
" The MMT solution is for the government to respond by removing cash from the system once the economy has returned to full employment by increasing taxes. "
MMT would also mean a reintroduction of Exchange Controls ( and an Exchange Rate controlled in some way the RBNZ), because on Day One that taxes are increased out of line with any other jurisdiction, our 'capital' will head off there at the press of a button. ie: the value of the NZ$ would be NIL without both of those.
So you're just totally ignoring the fact that our taxes are *already* out of line with other jurisdictions?
NZ has the 8th (out of 37) lowest top tax rate in the OECD. We have lots of room to increase tax rates (or, more realistically, introduce new higher brackets) and still have lower taxes than - say - Australia.
Robertson is being disingenuous about MMT because in reality he is half way towards it now.... getting RBNZ to buy back bonds and then lend the money to Treasury is effectively half way to MMT... the only bit that is missing is the writing off the debt, which could always still happen...
The management of debt is not so simple as it is being discussed here. Just the term "debt" needs to be carefully defined. Treasury and the RNBZ working together to fund Government spending is not really creating 'Debt' under MMT, they are issuing currency, which creates liabilities, but does not have to be paid back. Debt raised by the Government borrowing on the open market, either from individuals, banks or overseas will have to be paid back. This debt puts a burden on tax payers under the Government's current mindset, when it need not. So in this and any discussion the term "debt" must be clearly defined and understood.
Murry86,
I'm curious to know if you think money creation is a " free lunch".?
My own view is that when it is done by govt, it is essentially a form of tax . Every new $ dollar created appropriates some value from every dollar already in existence. This is essentially what monetary inflation is.
Bad as this is ( a form of wealth redistribution), using taxation policy to control the manifestations ( price inflation ) of monetary inflation , which is the MMT way, is a travesty, .. in my view
Good question. My view is it really comes down to how it is spent. The Government can issue currency to fund its spending priorities. If those priorities are frivolous or wasteful or favouring particular parts/people then they could indeed be a 'free lunch' for some one. Government integrity and transparency, as ever, is extremely important. But Governments can set policy targets to provide health care, education (even free education), infrastructure, and support full employment that can be properly funded by issuing the funds to do so. And then we get to you point about inflation.
Inflation is managed through taxation under MMT. The Government has created $billions to fund it's policies, and ultimately all this money is in circulation in the economy, without any further Government action, creating inflation as various individual and organisation try to vacuum it up. Instead the Government imposes taxes to vacuum the excess up, thus controlling inflation. Thus taxation is designed to control inflation, not fund Government spending. But I suggest we have examples that show taxation is not enough on it's own. Our housing sector has had essentially rampant inflation, out of step with the rest of our society, for the last 15 or so years, even though there has been taxes on at least part of the area in general terms (although not specifically 'housing'). This reflects an unbalanced volume of money being pumped into property regardless of the tax implications (or perhaps for some, because of them). With specific Government regulation on housing such as rent controls, the provision of rental properties, foreign ownership, bank lending into this area etc this entire market may have a very different appearance today. So the Government has an obligation, as it always had despite its denials, to regulate markets as well.
If you want to have money to save then only the government can create it by running deficits. A government deficit must be equal to a private sector surplus, (sectoral balances). Government debt should be though of as the nations savings account. If Robertson wants to reduce government debt then he must also believe it is a good idea to reduce our savings. An explanation here. https://gimms.org.uk/fact-sheets/sectoral-balances/
I'm learning to hate the term "helicopter money", especially in the way it is used here. MMT applied in such a fashion would be devastating in so many ways. Any and all spending by the Government must be considered and focused. And yes as yet Robertson doesn't get it, but that is really not a surprise. He still doesn't get the ramifications of the Government being a currency ISSUER as opposed to a user. But then many if not most economists don't either.
And as so many of the commenters already here indicate, he appears to be unaware, ignorant or just dismissive of the consequences of Government policies and positions on the economy.
What actions is the government currently doing, and what actions would be different if they applied MMT?
Wrong. MMT simply describes how an advanced economy works for a fiat currency issuer. It can be the foundation for policy decisions, but it is not a policy framework in itself.
MMT tells us that all government spending is made by creating new currency by the use of key strokes on a keyboard at the reserve bank. MMT tells us that taxation deletes currency and that government spending precedes taxation and borrowing and that borrowing in itself does not finance the government. Whatever Robertson may believe does not change these facts.
MMT tells us that all government spending is made by creating new currency by the use of key strokes on a keyboard at the reserve bank. MMT tells us that taxation deletes currency and that government spending precedes taxation and borrowing and that borrowing in itself does not finance the government. Whatever Robertson may believe does not change these facts.
I think you articulated that well.
MMT tells us that all government spending is made by creating new currency by the use of key strokes on a keyboard at the reserve bank....
I think you articulated that well.
Possibly - but not the truth.
We increased the Crown overdraft facility to assist with the potential for larger-than-usual fluctuations in Crown cash flows
We provide a Crown overdraft facility to help the Government manage short-term fluctuations in its cash flows. We temporarily increased the overdraft from $5bn to $10bn for a three month period, to assist with the potential for some larger-than-usual changes in cash flows. The overdraft facility was utilised for a short period coinciding with the Government’s April 2020 bond maturity, and the account has since been replenished following the issuance of additional bonds and Treasury bills.
At the end of June the Crown account had a positive balance of $18.2bn. Link
We provide the Government with an account that it uses to deposit surplus funds
If the balance in the Crown Settlement Account (CSA) is positive, our balance sheet shows a liability. If the Government is overdrawn, the loan is an asset on the balance sheet (see overdraft facility above).The CSA balance increased by $8.5bn over June to $18.2bn, with the Government's $7bn issuance of the new May 2024 bond playing a major role.
The government (RBNZ) is a currency issuer - it sells that currency to banks to issue to their customers wishing to swap bank deposits for notes and coins. It then has a liability to buy those notes and coins back if the community then wishes to be in receipt of bank liabilities rather than those of the RBNZ.
A bank buys a bank borrower's IOU contract with it's own IOU. The latter is commonly recognised as a deposit, which the borrower together with an approved pre-existing deposit can apply to settle a residential property purchase. The bank has a regulatory requirement to set aside an approved level of bank capital (shareholder funds etc) to underwrite the loan.
You didn't answer my question; banks are lending out at a factor of between 3 and 8 on their capital depending on how you calculate it or who you believe; are they creating money or are they buying that currency from the RBNZ? (From memory it was identified that during the GFC some US banks were operating on a ratio of up to 30:1)
I said:A bank buys a bank borrower's IOU contract with it's own IOU. RBNZ funding has nothing to do with this transaction.
According to the Reserve Bank, the new capital requirements mean banks will need to contribute $12 of their shareholders' money for every $100 of lending up from $8 now, with depositors and creditors providing the rest.
This disclosure is across all loans. Some loans attract lower levels of capital. The stand out category is residential property loans, given ~60% of NZ bank loans are issued to one third of households to conduct property speculation.
But I understand that depositors funds are essentially the property of the bank and are therefore 'shareholders' money. Any way the ratio they are allowed tooperate on is 8.333:1 down from 12.5:1. But I think you are actively avoiding answering the question specifically, to avoid having to admit that not every $1 loaned out is matched by $1 parked somewhere else. To whit the banks are to all intents and purposes creating money!
But I understand that depositors funds are essentially the property of the bank and are therefore 'shareholders' money
Depositors are unsecured bank creditors - bank customer deposits are bank liabilities, not assets.
As I said yesterday you need to read up on the various aspects of the banking system before contesting other's learned opinions.
Furthermore, I clearly stated banks are creating credit with their own IOUs.
Where will this additional capital come from? As we know banks cannot create net financial assets or add to the net money supply as assets created equal liabilities, so it would come from government created money supply in the end result, just as the interest that we pay to the banks must also do so. They may borrow from overseas, which is just another governments created net money supply.
Where will this additional capital come from?
In the case of Barclays Bank after GFC1 they wrote up both sides of the balance sheet with a contract that Qatar would use the borrowed deposits to invest in freshly minted Barclays Bank shares. Despite many UK court cases attempting to bust the bank and it's employees none have succeeded to date. Source - https://www.sciencedirect.com/science/article/pii/S1057521914001434#bb0…
Why do banks need to seek reserves for their exchange settlement accounts then? If their lending added to the net money supply they would be awash with reserves but in truth only governments can create reserves. Can we pay interest to the banks with their own money? That seems a silly proposition to me.
Why do banks need to seek reserves for their exchange settlement accounts then?
To smooth daily payment settlement imbalances between banks via the RBNZ.
RBNZ reserves are not fungible with general bank credit creation for loans to the public. Reserves are restricted to bank only interactions together with the RBNZ.
We manage the amount of cash in the banking system to ensure that payments can be settled and interest rates remain near the OCR
We initially injected large amounts of NZ dollars (in exchange for other assets) to meet increased demand for cash in the banking system. Our NZ dollar lending through the foreign exchange (FX) swap market saw our foreign currency assets increase by $6.9bn to $18.7bn during March, but this has since reduced to $13.0bn at end of June.
As a part of our role of managing fluctuations in liquidity, we have begun to buy back the Government’s May 2021 bond. At the end of June we had repurchased $2.6bn of these bonds. Link
We provide banks with accounts to settle inter-bank payments
Banks in New Zealand also hold accounts with us and use these accounts to settle inter-bank payments. These accounts cannot be overdrawn.
We influence the total size of banks’ settlement account balances when we conduct our operations. For example, when we purchase bonds from banks through our Large Scale Asset Purchases (outlined above), banks’ deposit the cash proceeds back into their settlement accounts at the Reserve Bank. As we purchase more bonds, this results in an increase in the amount of assets on our balance sheet, but also increases the amount of deposits that banks leave with us (as we have replaced their bond holdings with cash).
At the end of June the banks’ settlement balances were $23.4bn, compared to $7.5bn in December 2019. Settlement cash balances will continue to increase as more bonds are purchased through the LSAP programme.
Banks’ settlement balances declined by $2.6bn over June though, as investor purchases of the Government's May 2024 bond shifted cash into the Crown Settlement Account, which was only partially offset by our cash management activities (see cash management above).
The point I am trying to make to you is that bank lending cannot add to the net money supply and so it cannot be the source of money for its own additional capital requirements. Banks having to borrow reserves was another example of this fact, they cannot add to the net money supply. Only the government can do this. Nor can we save up bank created money and add it to our savings or pay them their interest payments out of the money that they create, bank lending is a zero sum game.
Bank has created credit. Anyone can create credit ( an IOU).
Credit is a claim on money.
Bank created credit is accepted by everyone , as a form of money, as a means of payment.
The credit that I can create is only accepted by a few of my mates, and they struggle to get anyone to accept it as a means of payment !
"It then has a liability to buy those notes and coins back if the community then wishes to be in receipt of bank liabilities rather than those of the RBNZ." How does the community communicate to the Government that it wants 'liabilities' and not cash?
And what is your view of what occurs when there is too much cash in circulation?
The RBNZ has committed to buying up to $60 billion of New Zealand Government Bonds from banks, fund managers and other investors. While this creates liquidity in financial markets, it doesn’t directly give the government money to fund its deficit. And once the bonds mature, Treasury will have to repay the RBNZ.
Is this an admission that in order to retire RBNZ QE related government bond purchases the RBNZ has to retire it's associated monetary base (reserve liabilities) obligations to banks that sold the bonds to it with Treasury funded redemption proceeds?
Furthermore, can one correctly say RBNZ LSAP transactions do not cancel government debt liabilities to savers, which includes RBNZ counterparty banks? The RBNZ in fact just swaps a government liability (public saver's asset) from a fixed interest rate government debt to a floating interest rate government debt until the former matures or is sold back to the market.
Robertson is preforming adequately. I wouldn't want him to be an acolyte at the temple of MMT. I appreciate Robertson sees financial nuances. HOWEVER, the World Financial System is largely a MMT system .. denying that this global structure exists would discredit any wannabe/current Finance Minister. [he has not denied this]
Now, we .. NZ prints our own currency - great advantage - especially if we loan in our currency. Unlike many South American countries that borrow money in USD. These countries time and time again have to debase their currencies to buy dollars, to pay back US denominated debt. Ironically these countries sell oil in USD.
How much of NZ's National Debt is denominated in foreign currency - I believe not much? This is great because we are in NO Danger of defaulting - we're the one who print NZD .. sir, sir .. we'll do you some right up!
Global QE happened, it continues to happen .. and is actually part of MMT. Globally we're now entering MMT's trickle up phase - QE (helicopter money) for Main Street. We have seen this a little with the wage subsidies - which I'm fine with. [for now]
Robertson needs to keep in mind The Wealth of Nations is found in living standards .. goods like; pots-and-pans - bikes and prams. You can wallpaper your house with cash, but if you don't have toilet paper, your Venezuela. Are Venezuela's problems due to failing to implement MMT tax policy .. of course not!
Again, Robertson is responsive and is preforming well enough. The best thing NZ could do is start building non-fiat reserves; Precious metals, crypto - taking bigger stakes in global development banks and fill some of the manufacturing vacuum that will be left by China.
Also:
Paying off debt takes money out of the economy - so can cause economic contraction.
Borrowing money can burden the economy - causing (ironically) inflation/deflation depending on the allocation of capital.
mmmmmmmm.
The best thing NZ could do is start building non-fiat reserves; Precious metals, crypto - taking bigger stakes in global development banks and fill some of the manufacturing vacuum that will be left by China.
Not going to happen. NZ is a swap line nation.
As for manufacturing, that would be good, but don't hold your breath waiting.
but being a swap-line-nation (having liquidity agreements with other nations) doesn't mean, in any way, we can't hold value in; Gold, Bitcoin, Drawing Rights, Development Banks, etc.
Well arguably an agreement with the Fed. Nothing stopping the ruling elite holding gold, BTC, etc. However, they haven't shown any inclination to do so.
Even among mainstream NZ society, gold and BTC are pretty leftfield, particularly among the wingnuts (there is some irony there).
Grant Robertson gives no reason for setting "arbitrary" debt targets, he just thinks it's "good for New Zealand". What a frustrating politician-esque non-response! And James Shaw is no better. Where is the political leadership to take us from "low public debt good" to "high private debt bad", and to recognize the connection?
In a situation which is a far greater global event of economic shut down we have often discussed the default action would be direct funding of debt from reserve banks. There would be no other options if the stone age was to be avoided. Its only a matter of time before such an event occurs. Hyperinflation usually follows such a solution so far. It would have to be very carefully managed if such a solution was ever tried and certainly its a slippery slope to hyperinflation.
If the NZ government was to do a direct bond note to the RNZ the markets might consider it a potential automatic default and that would effect not only the currency but the interest on all future debt raised on both the private and public markets.
"Modern Monetary Theory" is basically a made up name to give significance to fringe economic theory, in the same way that "Progressive" is used to give more significance to Left-leaning political viewpoints. Stephen Colbert, in his Daily Show days, called it "Truthiness" - misinformation that sounds just plausible enough to make it believable.
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