By Chris Leitch*
As the Reserve Bank winds down its money creation programme (Quantitative Easing) some economists and commentators are calling for a return to orthodoxy – as if the economic regime that was being followed in the run up to 2020 was somehow delivering better results for the majority of people.
They either have short memories or simply don’t have anything better to offer.
It wasn’t.
A quick glance at annual reports from the Salvation Army, Monte Cecilia Housing Trust, Child Poverty Action Group and many others painted a dismal picture of growing inequality, increasing poverty, and rising homelessness.
None of that has improved since. It’s got worse, but it was going to under ‘orthodoxy’ anyway, the Covid-19 effects have simply amplified it.
Matthew Hooton is one of those commentators. I recall a candidates meeting last election where, as one of the guests, he smugly tried to trip me up with what he thought was a curly economic question. He lost.
He calls for a return to orthodoxy arguing that the “extraordinary success of the Reserve Bank Act 1989 in killing inflation means an entire generation have never experienced how evil it is”, going on to suggest that then governor Don Brash beat inflation in the early 1990s.
Since the whole world achieved that status, Brash can hardly be credited with being the slayer of the inflation dragon and nor can the Reserve Bank Act.
The government owned Reserve Bank currently owns around 60% of the debt the government has incurred through borrowing. It has done that through a process known as Quantitative Easing. In layman’s language, digital money printing to buy that government debt off the commercial banks.
Because of the crazy money-go-round it HAS used, it has cost taxpayers billions in premiums over and above the price of the actual debt. At least the interest payments taxpayers are funding on that 60% of government debt is now going to the Reserve Bank.
That interest will be funnelled back to the government, which owns the Reserve Bank, as profit for it to spend - instead of into the pockets of the overseas shareholders of the commercial banks (Bank of America and Chase Manhattan for example) that it would normally go to.
Why would anyone want to return to orthodoxy with its worsening inequality and with taxpayers subsidising the profits of those commercial banks – unless of course one had shares in the commercial banks or was an economist working for one.
Don’t forget the government has $40 billion that it’s already borrowed (which taxpayers are paying interest on) sitting in an account at the Reserve Bank – so it really doesn’t need to borrow more.
Perhaps it should send that back to the commercial banks that created it out of thin air in the first place, as they do with all money they lend, including for mortgages, overdrafts and businesses.
How much better for the country would it have been to follow the advice of the jointly prepared Treasury and Reserve Bank aide memoire the government received in May last year.
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That report pointed out that it would have been much more efficient for the government to avail itself of ‘direct monetary financing’ – the Reserve Bank creating money (exactly what commercial banks do remember, when lending to borrowers) and putting it straight into an account for the government to spend.
That would have avoided the drain on taxpayer money being used to pay interest to commercial banks, and even the need to repay the sum borrowed.
After all, if the government is borrowing from its own bank, neither would be absolutely necessary.
Of course it could borrow from its own bank and to give the illusion of orthodoxy, pay interest and the original sum borrowed – effectively, as economist Ganesh Nana said, back to itself.
Either way the government would have billions to spend on hospitals, infrastructure like water and waste water, houses for those currently residing in motel rooms, and really alleviating poverty instead of giving lip service to doing so.
The Minister of Finance Grant Robertson preferred to ignore that advice, largely because he wants to out-national National and establish himself as the new holder of the ‘rock star economy” title rather than doing those things which would benefit thousands of New Zealanders.
Falling into the trap of returning to orthodoxy won’t fix any of those issues. Orthodoxy hasn’t in the past and there is nothing to indicate it can or will in the future.
Returning to it would be like going back to the horse and cart, rather than revelling in the freedom that the new unorthodox internal combustion engine conferred on our forbearers of the early 20th century and eventually a transport fleet of EV’s or hydrogen powered vehicles on those living in the 21st.
I don’t know what those commentators drive, but I’ll bet they wouldn’t swap it for a horse and cart.
*Chris Leitch is leader of the Social Credit Party.
14 Comments
Didn't I read recently that the ECB has started a program of buying AAA rated green bonds with a 0% coupon (i.e. an interest free loan) because they want to accelerate electrification and renewable energy generation to mitigate future risk while generating employment/inflation?
To me low inflation represents the greatest opportunity in a generation but has went largely unexploited.
Nice to see a different angle on this . Bond sales = basic income for the rich.
My only gripe is that RBNZ already creates money out of thin air when it spends money into the economy under instruction from the Government. When Government pays for a new road, or pays nurses' (measly) salaries, RBNZ creates new money out of thin air. This newly created money, which circulates in the economy, or gathers in bank accounts is GOVT DEBT. Taxation just cancels some of this debt.
Once you understand that this is how it works, it is clear that bond sales simply swap debt in the form of cash with debt in the form of bonds. QE does the reverse. So, why bother with either? There are some good reasons apparently - like providing a secure Govt-backed financial asset to balance the risk in private pension funds etc. But, there are other ways to do this.
It is definitely time for a re-think - particularly when the next 100 years are going to be ALL ABOUT how we make responsible use of real resources to maintain and improve population wellbeing. Money is irrelevant in a post-apocalyptic world.
You are wrong in part but you also share your perception of 'how it works' with a lot of people, including apparently the Government. The RBNZ creating money 'out of thin air' is NOT GOVT DEBT. It is however an obligation.
Try looking at it from a different perspective. Your perspective if applied to the economy since 1971 when the gold standard was dropped, would be hugely problematic. Since then the economy, and government spending has increased significantly. We have always been told that the Government must tax to spend, implying that there is a finite and capped amount of money in the economy. Capped at the amount there was in 1971. But because there has been so much growth since then, where has all the extra money come from? As the Government is the owner of the NZ$, only it can create more, therefore at various times since 1971 it must have created a considerable amount of money without incurring that "DEBT" you talk about. That "DEBT" also implies the absolute limit of money in the economy. Change the perspective from debt to obligation, and then it can be seen that the Government can create money, but if it chooses to do so, it then has an obligation to ensure it is used constructively and wisely. Doing so preserves the value of the dollar (it is floating), supports the economy and so on.
Historically it is apparent that our Governments, and likely most economist do not fully appreciate this distinction.
Ok - here's my attempt in MMT terms, which I find persuasive. 'Issuing currency' is really about whether a currency has widespread legal recognition as the unit of account, most commonly for paying taxes. I could issue my own currency in oak leaves, but it wouldn't go very far as means of paying my taxes, which are in NZ dollars - not oak leaves. However, if I could get a Bill through Parliament making my oak leaves the new NZ currency and means of paying my taxes, I'd be onto a good thing. Commercial banks can't do this, so they are by definition currency users. Sure, they can issue credit, but that is simply a loan that must be remunerated in some form to avoid us ending up in another GFC.
I agree. The author’s description of QE and the role of tax (eg, funding interest payments on Treasury bonds) is confusing. QE is simply an asset swap: RBNZ issues reserves to buy government bonds from banks in order to drive down interest rates. Reserves do not enter the real economy: they are by definition reserves which banks cannot loan out. So, it’s erroneous to say that RBNZ money printing is going straight into houses. Banks can buy Treasury bonds with surplus reserves, and, it is the combination of lower interest rates and interest paid to banks on Treasury bonds that is going into house buying.
So let's take QE out of the picture for a moment. The usual way government raises money is by getting Treasury to issue bonds to the private commercial market (tier 1 - commercial banks). The interest on those bonds (coupon) and their eventual repayment at maturity comes from tax (ignore for a minute that the govt often borrows more to make that repayment). Now bring in the Reserve Bank and QE which has swapped ownership of some of those bonds from the banks to the RB (as you say) - at a premium of course (additional profit to the banks and loss to taxpayers). Tax is therefore 'funding interest payments on Treasury bonds" whether they are owned by the commercial banks or the RB. That added too many words to the piece, so a compressed, less technical version was required. Of course I didn't say that "RBNZ money printing is going straight into houses". But the additional reserves being held by the banks has allowed them to massively ramp up credit creation for mortgage lending (over $50 billion of mortgages taken out in first six months of this year - vastly more than the RB's QE in the last 18 months) though so the knock on effect is just that.
Good to debate this stuff. For me, and others, bonds are irrelevant to how a government with monetary sovereignty finances its spending, as are taxes. Such a government simply spends its currency into existence, and the only binding constraint on it doing so are the real resources available to purchase in that currency - ie, inflation. The following links from much smarter people than I tell you all you need to know about monetary sovereignty and where bonds and taxes fit in. Interested in your thoughts: https://www.interest.co.nz/opinion/108139/jude-murdoch-and-steven-hail; https://gimms.org.uk/2019/01/06/bond-market-doesnt-control-anything/.
Good to debate this stuff. For me, and others, bonds are irrelevant to how a government with monetary sovereignty finances its spending, as are taxes. Such a government simply spends its currency into existence, and the only binding constraint on it doing so are the real resources available to purchase in that currency - ie, inflation. The following links from much smarter people than I tell you all you need to know about monetary sovereignty and where bonds and taxes fit in. Interested in your thoughts: https://www.interest.co.nz/opinion/108139/jude-murdoch-and-steven-hail; https://gimms.org.uk/2019/01/06/bond-market-doesnt-control-anything/.
He calls for a return to orthodoxy arguing that the “extraordinary success of the Reserve Bank Act 1989 in killing inflation means an entire generation have never experienced how evil it is”, going on to suggest that then governor Don Brash beat inflation in the early 1990s.
Since the whole world achieved that status, Brash can hardly be credited with being the slayer of the inflation dragon and nor can the Reserve Bank Act.
No. The suggestion was that inflation targeting killed inflation volatility (which it has very successfully). Not that it was Don Brash personally.
Pretty smug to think you won the debate when you don't even understand the point made.
Here's what Hooton actually wrote - "To them, Don Brash is the elderly curmudgeon battling the rise of te reo rather than the heroic Reserve Bank Governor who banished rising prices.
Since Brash beat inflation in the early 1990s,....."
I rest my case on that.
I'd rather be debating the substance of my opinion piece though.
Since the whole world achieved that status, Brash can hardly be credited with being the slayer of the inflation dragon and nor can the Reserve Bank Act.
But this statement is just categorically incorrect. Inflation volatility and levels were addressed the world over through the adoption of inflation targeting regimes - of which the Reserve Bank Act was the catalyst (both here and overseas). Okay, the appropriation of Don Brash is wrong, but equally so is your notion that the Reserve Bank Act did not result in low, stable inflation.
The rest of your piece doesn't really have much substance, tbh. You are effectively arguing for non separation of government and central bank operations - yet another categorically stupid notion. It is hard to plan for inflation when you don't give the market the option to price it.
"You are effectively arguing for non separation of government and central bank operations - yet another categorically stupid notion." Opinion but without anything to support it. Unless you're over 50 you wouldn't appreciate that the 'separation' is a modern construct. Our economy worked very well prior to the 1980s introduction of neo-liberal economic thought without it, and we didn't have the enormous level of inequality in society. You appear to be a supporter of the 'market' solving everything. Try applying that to the Commerce Commission report on the supermarket duopoly, and power pricing, petrol pricing and building supplies near monopoly.
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