By Alex Tarrant
The Green Party’s plan for the Reserve Bank to create new money to pay for the government’s multi-billion dollar Christchurch rebuild tab is the same type of debt monetisation practised by despot autocrats like Robert Mugabe, and not quantitative easing as the party claims, a leading economist says.
And the plan would shift the burden of paying for the government’s share of the rebuild from the top third of taxpayers onto everybody through higher rates of inflation – the bottom two thirds in New Zealand essentially pay no net tax due to transfer payments like Working for Families.
Meanwhile, Muldoonist-style political interference into the Reserve Bank’s operations will wreck the central bank’s claim of independence.
That will be very damaging for New Zealand’s economic outlook, as financial markets stop trusting policy makers here, New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says.
Print to buy govt debt
The Green Party on Sunday suggested the Reserve Bank should be directed to create new money to buy earthquake bonds issued by the government, as well as buying overseas assets to replenish the Earthquake Commission’s disaster fund.
Co-leader Russel Norman urged New Zealand policy makers to move in the footsteps of major central banks around the world, like the US Federal Reserve, to increase New Zealand’s money supply in an effort to counter the rising New Zealand dollar against those major currencies, which were being devalued by similar policies.
The US Fed, Bank of England, European Central Bank, and Bank of Japan have all embarked on forms of quantitative easing, using newly created money to buy securities from financial institutions in efforts to give those institutions the liquidity needed to kick-start lending, economic growth, and price pressures, once more.
But the Greens’ policy for the Reserve Bank to buy bonds issued by the government to pay for the Christchurch rebuild was not the same as those policies, Eaqub told interest.co.nz.
“It’s essentially monetising debt. It’s not even quantitative easing,” he said.
“The idea of the quantitative easing that is happening in the US and Europe in particular is that they are trying to provide liquidity to banks to promote credit growth in the economy, through the private sector,” he said.
“What [the Greens] are proposing is for the government to essentially monetise its liabilities through higher inflation.
“It’s just monetisation of government debt - essentially saying that the central bank will provide credit to the government,” he said.
In the US, while the Federal Reserve was buying up government debt through Treasury bond purchases, it was not ‘monetising’ Treasuries by buying them directly from the government with the newly created money.
“The government of the US is still liable for that debt. But here [with the Greens' policy], you’re just going to give that money away. The Treasury bills that the Fed is buying are from the banks, to give liquidity to the banks, so the banks can then lend that money onto the economy,” Eaqub said.
“Here they are saying [the Reserve Bank] should be buying bonds from the government. Those are two very, very different things,” he said.
'They've tried everything else'
Even if the Greens' policy was thought of it as quantitative easing, the situation in the US and the UK was very different from New Zealand.
“They have cut interest rates to zero, they’ve tried everything else,” Eaqub said.
“If you wanted to stimulate your economy, your first step would be to: One, cut interest rates; Second, to use fiscal policy. And if those things were still not working then you would go for this more unorthodox measure,” he said.
In the US and the UK, QE policies were actually designed to counter fears that demand in the economy would be so weak that it would lead to deflation – falling prices.
“Do we have that fear in New Zealand? Are we likely to have deflation? No,” Eaqub said.
“I don’t think we’re going to have a huge amount of inflation, but at the same time we’re going to have one of the biggest rebuild profiles coming through in construction projects ever. Now that’s not likely to be deflationary,” he said.
“It might be that, in general, inflation averages say, two percent a year. But there will be pockets of high inflation. Those are not the conditions where you want to engage in quantitative easing.”
Will QE even work overseas?
It was not even clear yet whether quantitative easing policies around the world had actually provided any real economic benefits.
“Sure we’ve seen financial markets go up, but we’re not sure if we’re seeing real demand in the economy improve as a result of it,” Eaqub said.
The question of how central banks unwound QE policies as the government had to repay securities when they became due, rather than being able to roll the debt over, had a huge question mark over it.
“You have to have an exit strategy. What happens if at one point in time that the Fed wants to reduce its balance sheet?” Eaqub said.
“What happens when they [the securities bought under QE] come to mature and [the government] can’t pay them back? Does the central bank become insolvent?
“The solution has to be either [the government pays out the bonds when they mature], or you monetise it, which would ultimately lead to inflation,” he said.
“And higher inflation is not desirable, because it’s a tax on everyone, and it hurts the poor more. Is that really the sustainable solution to what we are trying to address here?” Eaqub said.
“And I just don’t understand why there is this focus on monetising debt for Canterbury. Why is that different from the other debt that the government has?
“It’s just one of the slippery slopes to becoming Robert Mugabe,” he said.
“I know their whole story is that quantitative easing in the US and UK is not leading to higher inflation, but we don’t know that yet, because it’s only been a very short period of time. With these kinds of big policy changes, the implications will become clear over the long-term, probably over a ten-year period or something like that,” Eaqub said.
“The last previous example we had was really the post-war debt, which was essentially inflated away,” he said.
“And when you try to print money to pay off debt, the very extreme example is the German example [which lead to hyperinflation in the 1920s]."
Even if quantitative easing was carried out through a very strong public institutional framework, it would still over time lead to higher inflation.
“You are devaluing the value of the money. All else constant, if you’ve got more supply of money, then the value of each unit is less,” Eaqub said.
The poor would pay too
Inflation was effectively a tax on everybody, where all would pay the higher cost of living.
“Whereas, if we have government borrowing [for the Christchurch rebuild] then it’s funded through general taxes,” Eaqub said.
He pointed to a recent Treasury paper which showed essentially only the top 30% of income earners In New Zealand paid net taxes, as the remaining two thirds benefited from government transfer payments like Working for Families.
“So if we pay for the Canterbury rebuild with general tax money, then it’s going to be only the top third of income earners in New Zealand who will fund the recovery of Canterbury,” Eaqub said.
“There is a social equity perspective. Should the poorer people be penalised to do the rebuild in Canterbury?
“My preference is to pay it with debt, because we do have access to credit. Our government debt to GDP ratio, while it’s rising, is still relatively contained, and we can get it under control,” he said.
Independence out the window
Meanwhile, a policy like that suggested by the Green Party would see the Reserve Bank’s independence thrown out the window.
“If you wanted to get the Reserve Bank to start buying government debt with printed money, you would have to change the constitution of the Reserve Bank essentially. You’re mixing up the independence of the central bank by monetising the government’s debt,” Eaqub said.
“That kind of stuff is very much a tool used by despot autocrats around the world. That’s what they do: ‘We’re going to borrow all this money, and essentially we’ll get the central bank to monetise it,” he said.
“It’s tax by stealth."
“It’s a very draconian measure, and something that will wreck the independence of the central bank – something that’s really important. One of the really great things about New Zealand is the transparency of our institutions, the transparency of regulations,” Eaqub said.
“The independence of the central bank has been very positive in terms of ensuring stability of financial markets,” he said.
“That aspect is really frightening for me. If we have this political interference coming through again, as we had in the Muldoon era, that would be very damaging for New Zealand’s economic outlook.”
“Ultimately financial markets are built on trust. If that trust is broken then we don’t know how it’s going to work out.”