NZIER's Eaqub: Greens' quake bond buying policy not QE; It's the sort of 'debt monetisation' practised by Mugabe; Will see poor pay for quake rebuild via inflation

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.

'Monetising debt'

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

“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.

Why inflation?

“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.”

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A compelling argument by Eaqub  , however he offers no alternative suggestion . We still need to weaken the currency at least back to its 2 year average  , for our export sector to just survive .
NZ is now a victim of its own success , the way I see it is the currency strength reflects good fiscal and monetary polict management by the authorities .
I am in favour of intervetionist policies by the RBNZ of selling the Kiwi $ and buying gAustrailian$ or Singapore $, or even the South Korean or YEN as a strategy to weaken the NZ$.
Even the RBNZ just talking about doing this could help .
Doing nothing is just dumb .

Eaqub is typical of Key/English fellow travellers.
1. Just say "No it won't work"
2. "No, I don't have an alternative"
3." I dont care, anyway because I have a big fat cushy number to save my a**e"

"for our export sector to just survive"  Would you like to quantify this statement?
e.g. Our dairy industry is the largest export sector I don’t here them stating they failing on mass
Perhaps other parts are?
Any economy is not a static beast which never changes.

@Colin .... which rock have you been hiding under ? There are so many export orientated companies that have hit the skids or whose share price has collpsed , I am surprised at your remark .
Start with Feltex , then look at Fisher and Paykel , then take a look at the entire ( now non-exitent ) clothing and shoe manufacturing sector .
I am told that even some of our dairy related businesses  are on short time.

@ Boatman
Some broad statements here seriously  to what level would we need to trash our currency to make footwear and mainstrean clothing viable again that is to enble us to compete with the wages in Asia or other third world nations thats what this sort of nonsense is suggesting.
The problems Fisher and Paykel experienced were self inflicted they are now turning the corner.
Stop reading sensational headlines.

There are many other things he didn't do as well.  He didn't solve world peace or explain why the Duck crossed the road *BUT* he wasn't asked about peace, ducks or alternatives, he was asked to evaluate how realistic the Greens proposal was.
So that explains that supposed failing.

How did the FX question become so convoluted? Drop the interest rate and the currency will follow. No need for new economic theory, of delving into unchartered waters, just keep it simple.

I like Shamubeel Eaqub, I'm pleased we have people of his calibre here. As he says, paying for your stuff is best. If you can't pay for it you have to borrow and pay the debt. If you can't pay the debt then you have to sell stuff or default. Inflation is default by stealth. We have all learned to fight this inflation/theft by stealth by buying assets on tick (ie houses). That way the real value of the mortgage principal goes down with time.
If the RBNZ needs to bring the exchange down a bit then the last thing they should do is fund the government. Yes, I know some of the government spending is good snd some is not but that is not the point - it sets up a moral hazard whereby any aspiring politician can stamp his little foot and say "The government should do something about it" . Yes, you can buy votes with stolen money.
Likewise, if the RBNZ is foolish to buy our own, relatively sane and circumspect, government debt then it would be daft as brush to even consider buying the debt of other countries with highly disfunctional governments.
What to do, well, two things spring to mind.
One, keep tightening the Core Funding Ratio, 100% for the next five years might be about right in the long term, but an extra 5% each year seems like a gentle move in the right direction.
Two, if you want radical then consider the RBNZ diversifying its reserves into hard commodities. The idea is to exchange a ledger entry which will cause future inflation for a bar of gold that took real human effort to create. This is an uncertain path and should be rate limited, eg a tonne of gold a day each day the NZD is above 80c US. Of course, a radical new technology for extracting gold could mess things up big time. So start small and see how it works before getting too serious.

Matt Nolan at TVHE comes to the same conclusion:
Matt's conclusion:
"To summarise I’m saying:

  1. We don’t need QE in NZ, as we have enough monetary stimulus (and if not we can cut interest rates further).
  2. What is being suggested isn’t even QE – its the monetization of government debt, effectively a inflation tax to pay for the rebuild in Canterbury.
  3. It is unlikely that such a tax is the “best” way of raising the revenue to rebuild Christchurch – which should be the primary question.

This is the main gist of what is going on here."

Photo for this article not quite correct. I've made the necessary adjustment.

Robby217 - haha - good laugh.

The Greens is 
NOT incorrect to ask for moneytisation of the Chch rebuilt. (that's what it actually means)
In raising the fear of inflation and in trying to differenciate the QE of USA / Europe, Mr E is unfortunately talking from the other end of his body.
It is a clear as daylight that QE 1, 2 and 3 from the Feds has done nothing to improve the economic prospect of the US. Neither has the "do whatever it takes" QE of the ECB. And certainly has not created any inflation. (other than Banker's bonus)
In a simple word "QE has failed in USA and Europe" Other than goosing up the stock market, (and increasing Banks reserve so that the Central banks can pay them interest to keep them alive) and making a bundle of bonus for the financial sector, QE has not done anything for the ordinary people (which MR E seems shows great concern about inflation for).
ON THE CONTRARY, it is exactly the TYPE of QE that the US, ECB and BOE has been doing that is the WRONG type of QE. The Greens proposal far from being "Wacky" is the correct way QE should be practiced as it pumps money DIRECTLY into the economy instead of Banker's pocket. The least moneytisation of Chch rebuilt can do is to put money into the hands of Builders and workers in the construction industry (which is a lot better than putting money into the hands of rich Bankers) 
Albeit this might cause price rises in the construction sector wages (is that really a bad thing?) material cost will most probably not incresase much due to the current world's deflationary scenerio. The current high cost of construction materials is caused by high cartel pricing and import impedements. If the goverment is willing to undo the cartellised nature of the industry (and offend Fletcher and Carter Holt), materials inflation would not be much of a problem. And if the were to follow up with a policy to reduce land cost (like freeing more land by rezoning, DUH !!) inflation would be managable.
As regard to the devalueation of the Kiwi dollar, again is this a really bad thing ??
Much has been discussed on this issue, so I will not add to it in this article. Other than Mr E's purported sympathy for the poor, I really cannot see the rational of his concern. 
Caveat:  I am not a Green supporter and I do not agree with Green's policy in almost every thing.
Oh, by the way, Hyperinflation is a "political" problem ala Mugabe and not neccessary a "money" problem.

"QE 1, 2 and 3 from the Feds .. has not created any inflation."
(a)  Inflation is not zero in the USA, though may argue none of the inflation is caused by Q.E., but you should present evidence of such a claim.
(b)  Because QE is not simply monetizing the debts, which is the Greens proposal.
Hyperinflation isn't a problem with money ... until you try and use some.

On the contrary, The Fed has been trying to CREATE INFLATION for the past 4 to 5 years and has been unsuccessful.....does it mean that there is inflation in the US ??
QE is moneytising of debt by stealth...the expectation was that "the Banks would then pass on the liquidity to the economy"...hmmmmwonder what does mean ?? Fortunately (or Unfortunately for the US) the Banks did not do as expected....and therefore QE was rendered ineffective.
The Green's monetisation of Chch debt rebuilt will "pass on the liquidity to the economy" directly instead of through the banks. Is this a better way of "monetary transmission" or not??
If we are to assume (and we should not ) that the politicians only restrict the QE to Chch rebuilt, is this not a better way both to refinance the rebuilt AND takes pressure off the ever rising NZ$ ??  
Perhaps now that the Feds has decided  on "QE Forever" maybe this might just pass on a few bucks to the US economy.
Hyperinflation IS a political problem, not a monetary one. The Central Banks can always reverse the liquidity injected into the economy and stop inflation from rising, but unfortunately they seldom do because of political pressure and the usual negative  economic impact. Thus hyperinflation IS A POLITICAL problem, not a monetary problem.
Paul Volker managed to bring inflation from the high teens in the US by causing a massive recession in the US economy. No other Central Bankers will ever dare to do what he did anymore.

In terms of QE in the US having no effect,
This depends on 2 things, you take it as an absolute positive effect, ie we didnt recover. When in fact Qeing facing off against austerity mitigates the negative effect as its too small to counteract the neg forces.   Also recoveries from financial events are shown to take a long times to recover from.
1) without QEing we'd be deeper in the poo.
2) Actually US job growth seems to be up, this means lower un-employment....
I do agree on the Green's proposal being dubious...economically its dangerious and throwing money at chch to only see it disappear in another eq is pointless and wasteful.

QE is Mugabenomics.

Buying bonds either directly by the Reserve Bank purchasing or through their commercial bank surrogates to finance governments shortfall amounts to the same thing.

The debasement of a countries currency is the last dich effort to prop up a dying economy when everything else has failed.

if borrowing from the RBNZ leads to inflation, wont borrowing from Foreign banks also lead to inflation?

Yes and no.
a) consider the situation, there is normal and there is the zero bound trap. 
b) Then consider Inflation is the expectation of future price rises due to the extra money floating about.
In a normal situation printing causes inflation, yes.  Borrowing can cause some inflation but the sum is going to be re-paid plus interest, so the expectation of the extra money floating about isnt there.
When in the zero bound trap printing and borrowing doesnt cause inflation, in fact its hard to even stop dis-inflation ( which is the problem we have right now).  The problem is when we get out of the zero bound trap, ie a recovery then yes inflation could be bad...hence borrowing is the "normal" way to stop that....
This is my interpretation of keynesian policy/economics for the situation we are in.
Others, non-keynesians see huge inflation and hence buy gold or property......
The problem I see with that  is I think we will see a huge depression with deflation and then inflation.  So gold shouldnt do well in a depression (it hasnt in the past), but will do well after that process has finished and we see inflation.  Then its time to consider buying gold (or silver) with cash, it must be un-tracable by the Govn as the Govn will take it, or property or something similar...but thats my view of the future.

Is the Green policy not to repay the loan to the RBNZ?
I would have assumed it would be repaid, only logical thing to do to stop the worry over Zimbabawe inflation.

I dont like QEing.....its smoke and mirrors IMHO...its really printing.....just by another name.  For being trapped in teh zero bound thats probably saving the US's bacon, but once you get out of that it could cause fact I'd expect it to the only Q is how big.


We know that the top third try and avoid paying tax thru rebates etc
So the question is WHO IS PAYING TAX?

people like me who only have a salary, own 1 house with a mortgage, don't have trusts for Africa & pay school fees :(


and the way things are going if it nose dives like I think it will the likes of you and I will be paying for the gamblers as well as paying for what we are the pi's  and farmers go bankrupt as the properties they gambled would go up in value go down. That sends banks insolvent which means our Govn steps in to stop bank depositor runs...which means we are on the hook for billions over the next 20 years.  Meanwhile the WFF collectors and rich who "cant" afford to pay for that wont be, yet arguably they bear a significant part of the blame for it.
I quite like the idea of debtor prisons making a comeback myself.  Though of course the caveat "be careful what you wish for applies"

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.
“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.
I take issue with Mr Eaqub's utopian, but nonetheless, naive view of the expected outcomes of the US Federal Reserve's QE initiatives.
Let's be clear large US banks buy US Treasuries and qualifying Agency mortgage debt in anticipation of delivering a portion of their repo financed holdings at the POMO window whilst retaining a permanent and growing asset position (USD 1 trillion+) to take advantage of the falling term rate structure. View the US large bank H8-Assets position and the primary dealer RP & RRP graphics.
Anatal Feteke provides theoretical analysis confirming the reality that not much lending to Main Street is actually taking place.
Professor Fekete neatly and in my view effortlessly goes on to explain the dilemma facing all businesses financing capital and labour when interest rates fall by large degrees.
Our own farmers have apparently been caught by such fallout after mistakenly agreeing to contract to pay fixed in the interest rate swap market against the receiving bank as far back as 2007 for 5 years or more..

Well said. !!
Mr E is mere restating the usual Bs that QE is good only when it is directed at the Banks and Financials and Not Good if it is to benefit the ordinary people.

"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.
Note his use of the word "trying" ... says it all really.
I think we need to do something "unorthodox" but it would need to be well planned (over a reasonable period of time) and meticulously timed.  It would need to be coordinated between the government and the RB and executed without prior public consultation.  
Take Costa Rica's improvements on many indices since the GFC;
It looks like they just decided what was important and went for it.

Equab says   
“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,”
Presumably it is not necessary to regard these two steps as sequential but could be used in concert.
I would ask where is the fiscal policy in the Key/English toolbox? There has been little if any evidence that they have any ideas and allied with the lack of purpose of former RB head Bollard, we keep heading blindly for the abyss.
On the other hand they may confuse stimulation with recovery and I would humbly suggest they do not have the nous to recognise the difference.

Hugh its beyond them.
By the way check out Normans roots follow the socialist party link
Russell William Norman (born 1967) is a New Zealand politician and environmentalist. He is a Member of Parliament and co-leader of the Green Party alongside Metiria Turei.
Norman was born in Brisbane, Australia, and moved to New Zealand in 1997 to observe the red-green Alliance coalition. He wrote his political science PhD thesis on the Alliance, and was active within the party editing its party newsletter. Whilst living in Australia, Norman was involved with the Socialist Workers' Party for several years.[2]

Whilst living in Australia, Norman was involved with the Socialist Workers' Party for several years .  oohh- thats INTERESTING...!      and why did he leave them,if he did ?
watermelons under the bed or what

It surprised me that Russel and the Red-Green Show didn't think of running up a multi-billion dollar batch of $ 1000 notes on recycleable natural hemp-fibre paper , and distribute them around NZ by letterbox drop ( using the nation's cycleway to save on the carbon footprint ) .....

Hugh - aren't you supposed to be, "buggerising around on Facebook all day." Anyway, if Messrs Key and Eaqub have got you concerned about Norman turning NZ into Zimbabwe then fear not, have a read of this:
But ask yourself what is Key and co. really doing about addressing one of the key preconditions for such a problem? In addition, is Norman's proposal working for or against that precondition? Does his proposal increase of decrease our foreign liabilities? Does it improve or reduce our debt servicing capacity? 
Perhaps others have spotted it, but when emotive fear based and disingenious narrative starts to appear, logical arguements have probably disappeared. Anyway, have look at that link.
Cheers, Les.

Hugh - I'll answer my own questions then.
"But ask yourself what is Key and co. really doing about addressing one of the key preconditions for such a problem?" I'm referring to productive capacity. It is this that Weimar and Zim did not improve as they printed. Key is doing precious litte of significance either, all while continuing to rack up more foreign liabilities. I wonder how that might end ....
"In addition, is Norman's proposal working for or against that precondition?" For - as we'd be restoring and improving ChCh's productive capacity. Also note the spend is already planned and budgetted, and of itself is backed by productive work, it's not as though we would be printing just to pay creditors or civil servants we dare not sack.
"Does this proposal increase or decrease our foreign liabilities?" It reduces them. Plus, we don't end up paying interest on some other nation or bank's printed QE derived money. Hence less inflationary than interest bearing foreign debt. 
"Does it improve or reduce our debt servicing capacity?" See answer above re. ChCh productive capacity and also consider this moves us away from agency monitored foreign debt limits, not toward them.
As for the sturctural problems you refer to Hugh, we should not only champion solutions for a small number of them, there are many other valid things we could do, but unfortunately many go agains the status quo. At least with your solutions you'll get a few converts who have seen the opportunity and positioned (zoned) appropriately. However, without a broader approach your solutions carry so much inertia they are unlikely to present the outcomes we all desire, but because you pull in the broadly the right direction, IMO, you should have support, I think.
Any comment on the answers to those questions?
Cheers, Les. 

Hugh - I used to share your view, about such measures being inflationary. However I changed my view based on the kind of analysis & reasoning given above. It was hard to make the change, but I was happy to persevere with the reading and allow it to challenge me. I'd never taken the time before and simply believed those meant to be my betters, pollies and economists. Then I stopped believing them, for some reason ....
So I need to ask what reasoning do you base your view on and how does that reasoning neuter that which I and John (on his blog) have shared?
Cheers, Les. 

Thanks for your comments Les, the inflationary arguement against the Greens proposal based on Zimbabwian inflationary risk is shallow and repetitive.

Good morning Mr Mayor, I think you should have shot mate. A look back at some detail might help Hugh, noting that this would not be "artifical expansion of the money supply":
"INTERVIEWER                      So what will this do? Because any economist will tell you if you go out there and create massive amounts of money, it’s going to affect inflation. Prices go up, don’t they?

NORMAN              Well, I mean, there's three responses to that. I mean, first, if you look at the last monetary policy statement from the Reserve Bank, it was right at the bottom of the band. There's not strong inflationary expectations going forward. Secondly, when you look overseas at the use of quantitative easing – because all of our major— most of our major trading partners are using it – it hasn’t produced major inflationary problems there. And then thirdly, the way we’ve designed QE or the proposal that we’re releasing today is specifically designed to reduce the inflationary effects. So if you look at the earthquake bonds, the earthquake building is happening already, so we’re not increasing construction activity. We’re actually just making sure that we’ve got the money* to do it. And the Natural Disaster Fund, which is currently empty, we would be restocking the fund with foreign-denominated assets, which is— And it’s important to understand this – the Natural Disaster Fund is stocked with foreign-denominated assets, because in the event of a big disaster in New Zealand, you want access to those overseas assets. So once you start purchasing overseas assets with New Zealand dollars, you don’t add to inflationary effects inside the New Zealand economy."
* Plus note Hugh, that the money Norman is talking about is interest free and that of itself relieves us of the inflationary effect of interest we would have to pay on this debt if the money is supplied wholesale.

Alex - I'd be interested to know where Shamubeel thinks Norman is wrong about these two key considerations.
Cheers, Les.

Hi Les, just quickly (i've got to run off to do govt accounts) from discussions I've had with a few people around the traps:
The idea that buying foreign assets with the mewly created money won't lead to pressure on prices:
Those NZ$s aren't just going to disapear once you buy foreign currency with them. They're going to be wanting to go somewhere - possibly the NZ banking system. So you've got more NZ$s looking for a place to be = lower interest rates, more borrowing and spending, more price pressure.
On the idea that creating new money to pay the govt's quake liabilities, displacing govt borrowing for it:
The Greens themselves say that this would free up those who were going to lend their NZ$s to the govt (buying bonds) to put their NZ$s elsewhere, which could lead to lower interest rates, greater borrowing. Could = more spending, more price pressure.
I'll ask around and see if anyone (like Eaqub) wants to write a more detailed piece on why they think it will (or could) lead to greater price pressure. Then I'll try find someone to argue against it.
The Greens have certainly kicked off a debate! Enjoying it.

They're going to be wanting to go somewhere - possibly the NZ banking system
Sharpen up lads - they can only go into the NZ banking system - no where else can lodge the NZD value.

Yeah, good on the Greens for getting us thinking, or not as the case maybe. Am keen to carry on this discussion too as we are hopefully all becoming better informed as red-herrings get kippered and realities continue to appear, but also pushed for time and am concerned the thread will get to "Pumpkin Deadline' before we get far enough. So how about kill the 2-day deadline for some these knotty, but more interesting QE focused threads? I have got par-baked answers to those points, but need to do some checking before dishing up the hokey-pokey raspberry ripple* .... Cheers, Les.
* non-vanilla. Am perhaps being too obscure.

Alex - maybe we are full circle on this ....


Yep, hear what you/they say, but there is too much "possibly" and "could" being used, whereas, possibly NOT, and, may NOT, is also valid. So when you are trying to get someone (an economist) to go a bot deeper with this, I'd appreciate some probabilities being quoted and backed by evidence. Because I can tell you for certain, given the evidence we see around the real economy, that the current policy setting are definitely having a delatarious effect on the real economy.


Now for something a little more practical (now you know another reason econmisseds just hate engineers ...) and to kind of go full circle - "Use the ratios, Luke" - go to John's blog:


and see this article about the recent - 'IMF paper on macroprudential instruments'


Because if we (you know who) could swallow our pride, ditch TINA, start seeing TARA, (ther are reasonable alternatives, Bill, John , et al) there would be less need to consider QE style approaches to reduce the overvaluation and volatility of NZD.


Cheers, Les.

Hugh - Do you have up to date figures on how much EQC has paid out on repairs? Also do you have any up to date figures on their administrative/running costs excluding actual repair work?

House insurance eq levy goes from $4 to $12 a month in a year....
Insurers premium from $40 to $51....and that's not chch either, love to know what chch's is going up by.

"a leading economist says"
Too ashamed to be named are they Alex

If the Govt put out bonds to pay for ChCh rebuild and they were not allowed to ever be traded by banks (i.e. they cannot be leveraged at ALL) then this would actually produce debt that was actaully backed by something real (i.e. the buildings and infastructure in ChCH). Surely the NZ "rich" would want a piece of this real debt and lossen up some money FOR NZ BY NZ.
Also; these bonds would be very very valuable around the world would'nt they to other super rich? and can be sold for REAL gold or some other commodity like Oil etc. that has real value.
As the world collapses (we are in an ongoing train wreck) then surely this would be so much better for NZ when the big "reset" happens (like all the coal/oil still in the ground) and the rich lose all their vapour wealth.

I just have one question . Is there really a problem with the economy and if so can someone tell me what it is .

WE built a lot of debt against non-productive assets, that we now cannot pay back, even with selling assets .
 The government continues to borrow but is it investing in areas that will give enough return to pay back the money?
There is no  "corresponding human or physical assets by which economic growth can repay the debt."

so govt debt is the problem then isnt that a  just a stimulus is it not?

If you could tell me how well they are spending it?
 From Wiki
The New Zealand GDP per capita is for instance less than that of Spain and about 60% that of the United States. Income inequality has increased greatly, implying that significant portions of the population have quite modest incomes. Further, New Zealand has a very large current account deficit of 8–9% of GDP. Despite this, its public debt stands at 33.7% (2011 est.)[21] of the total GDP, which is small compared to many developed nations. However, between 1984 and 2006, net foreign debt increased 11-fold, to NZ$182 billion, NZ$45,000 for each person.[9]
The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. At 31 December 2011, gross foreign debt was NZ$257 billion, or 125.8% of GDP.[22] At 31 December 2011, net international debt was $147 billion or 80% of GDP.[23]
New Zealand's persistent current account deficits have two main causes. The first is that earnings from agricultural exports and tourism have failed to cover the imports of advanced manufactured goods and other imports (such as imported fuels) required to sustain the New Zealand economy. Secondly, there has been an investment income imbalance or net outflow for debt-servicing of external loans. The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008

The money is spent to have a beter stanard of living that govt money circulates with in the economy cut it back and everyones standard of living will drop we are and primary suported country but our primary population  is 5% we can not afford to have big cities we are trying to be biger than what we are ,live city lives not very many people in the cities really make money for New Zealand only exporters do or expats that bring savings back into the  country and spend it with in the country to a certain point with out effecting velocity of the money circulation . How would you spend money more effective ? it coulnt be with in cities 
There is nothing wrong with the economy people are the problem wants outweigh needs.

Just a case of buying votes, that sometme in the future someone else gets to deal with.
 Interesting our slide down the weath table compared to others, I always thought we were ahead of Spain.  Poor leadership gets you in the end.
 What do you think we would look like if we had no debt to Aussie banks or even owed it to NZ owned banks where the profit got reinvested in NZ? At the moment Australian banks have a big straw inserted in us and are proceeding to suck the life out of us.

So banks dont pay tax in NZ?

They take more than they give.

And the lot of them are well practiced at try-on tax structuring interpretations as well;

No private debt (too much) and not enough private spending are the problem. (all else being equal)

No, there isn't.

No, there isn't.

? Govt deficits or debt must have been a stimulus at some point right . If not please explain  

debt has an interest component, if you borrow against capital gain and it does or doesn't happen it hurts. the debt remains just the name changes and as you can see above the winners are the banks
In theory there is no difference between theory and practice. In practice there is. 
Yogi Berra 

All debt....

Yes there is a problem with the economy.
The problems are,
1) Expensive energy
2) Too high a private debt
3) demographics
4) Properties bubbles / pnzi schemes
5) Massive fraud
6) Peak everything (incl water)
7) Over population
8) Climate change
9) voodoo economic policies
10) Rising inequality
Is that a good enough start for you?

steven - #7 OVERPOPULATION a problem for NZ economy ??!!     your sense of humour is different ,to say the least

Certainly Auckland is getting there. 
Much less pleasant place to get around now. Too congested.

The word was actually "economy" which I took to mean global.
However when you look at the % of NZ unemployed and especially the un-skilled and obsolete skilled (bankers etc) then in that context we are over-populated with the wrong mix shall we say.  Now sure it maybe in the future we need more carrot pullers (farm labourers)....Im sure we will.

Yes there is a problem with the economy.
The problems are,
1) Expensive energy

Expensive compared to what? (Everything is relative…)
2) Too high a private debt
Your debt might be too high, but how is it a NZ economy problem?
 3) demographics
Which aspects of NZ demographics do you consider to be a NZ economy problem?
4) Properties bubbles / pnzi schemes
Normal for a loosely control or unregulated market economy.
5) Massive fraud
“Massive”? There’s only a handful of people who spend all day every day posting on I wouldn’t call it “massive”. I wouldn’t call it a NZ economy problem either.
6) Peak everything (incl water)
Peak delusion?
7) Over population
Compared to …?
8) Climate change
See #6 above. Not a NZ economy problem anyway.
9) voodoo economic policies
Subjective opinion only.

10) Rising inequality
We are not created equal. Not a NZ economy problem.

Is that a good enough start for you?

you do not pose an opinion or an  agument but rather just the ability to copy paste . No solution ?

How much do you like change?

“You know, I’m all for progress. It’s change I

object to.”

Mark Twain


  We need to cut government spending, (im not talking welfare) and we need to slash taxes.  

 Then we need to sit down with 4 large Australian banks and have a wee fireside chat about the perils of finding yourself on the wrong side of mob Violence.



William K. Black

There is legal organized crime and illegal organized crime.

When legal organized crime does not work...illegal organized crime is turned to.

I am but a simple NZ  sheep herder, living in California.
 I must say we found the US gas price threshold. Its $5 a gallon, Ive never seen the roads so quiet.

Andrew how far North in Califonia are you, lost on your way to Oregon? :-) Got stuck on the   I5 last week ...don't tell me it is quiet..home at the weekend.

No it really is, I took my daughter to swimming and it was noticeably quiet.  Even i5 had less trucks.  I think Oregon is much better off than around here. All the locals are talking about moving up there. We are spending Thanksgiving at Hood River, Oregon is so much smaller and less government.  Honest Indian there was a lot less traffic.  The i5 always gets blocked around Portland anyway, head south a bit.
 They say the gas price will be back to normal by Friday so will report back if there is a difference. Im from a Scottish Presbyterian background, always look on the darkside of the brightside.  Have a good trip home, Im not far behind you.

Yeah I think you like the dark side and yes you can find it there, but the otherside is there as well:-) North Califonia is more depressed...Oregon is mixed, Sisters/Bend in the high desert is beautiful however the LA crowd there are little down on their luck...however Seattle and Portland are great. Have a place up that way...nice state. 

Welcome to the machine, have another cigar.

$5 a gallon - yikes I can see my sister's shiny new fifth wheel becoming someone's family home at about a third of the price she paid for it.

Yeah, tell that to her 6.2L, V8 engine :-).

Brother (also in the US) asked me recently what had happened to our natural gas conversions of the 80s ... so they're certainly thinking about it over there.  Especially those doing the big commutes.

monopoly pricing makes it unattractive - my central heating gas bill is outrageous.

PG&E sent me my gas bill and a breakdown of the generation. Nuck is %20 but the interesting part is gas has gone from about %22 of generation to %38.
  Gas is still $4.99 a gallon this morning.

but consider NZers average mileage is 14000km and the US is 15000 miles (24000km)
So the gas bill for the year or per month/week would be what counts.
Sadly fuel alternatives need to see $2.50+ to make sense and we and the USA economically cant afford that...not as we use it now.
For instance I use one $90 tank a month so $4 a litre isnt going to cripple me financially....ppl using a tank+ a week on the other hand....

Just ask the likes of Marc Farber & Jim Rogers what they think of money printers......

and Im sure we could add to that list of austrians....that doesnt make them right.
Last I heard Jim Rogers was living in Singapore praising the chinese as they were the future....well we can see how that is turning out.
Marc Faber, well he makes my outlook look like a good day!


 “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."


0kay, let the Reserve Bank lend for the Christchurch rebuild at a very very low interest rate with say a 100 year term.


Thats just printing....more realistically we can borrow for 10 years at <4%....allow for inflation and thats a real interest at about 1.5% with little risk of a downside.
In terms of rebuilding Chch I have to ask why?  whats left there? economically its never going to recover.  The kicker however is the fact that the shocks could continue for 4 or 5 years.  If they do there will be no re-insurance and then no mortgages and then no chch...

Once again reality will prove you wrong ...

huh?  That I Q that chch is worth rebuilding?  or re-buildable?
that shocks are expected to continue?
If there are no shocks what's been proved? the gamble that there wouldnt be has paid off?
I just got my new insurance policy the EQ levy is three times last year and the insurers policy is 30% higher....some jump in a year.

In terms of rebuilding Chch I have to ask why?  whats left there?"
Steven - please do come down for a visit, we'll show you. Plus, notwithstanding the trials and tribulation of the incompetence we suffer, we'll be able to give an idea of ChCh's reasonably bright future, even if it doesn't look like what the 'central planners' are planning.

Les, I love Chch and my wife even more so....before this we were looking to move wild horses couldnt drag me near the place.
When you look at things like Peak oil and debt then you have to stand back and say how is it going to be done...and why.
If it was me. I'd walk away, instead Im staying away.

Fair enough Steven, maybe give it some thought once we are further down the track with the recovery. As for why fix it, the fact is, relatively speaking, there isn't too much to fix, of the 'economic engine' of the city and region, it's still largely very intact and much of the lifestyle aspects of the location are still here. What needs fixing will still be hard work, but in the end it'll be better than what we had, although like many I wish we could do more to save more of the heritage stuff, but not at the expense of life risk. Plus, I'd like to see more speed, but oink, oink, flutter, flutter on that one. Anyway I have to be careful of being a quasi-hypocrite as I leave to go overseas for a year or more soon, something that was planned before the eqs. They just held things up a bit, but it was good to be here doing what I could to help. Our main problem right now though is not me leaving, but Ritchie McCaw leaving, I think the Crusaders will cope though. Cheers, Les. 

Les he is just looking for a reaction and not really interested, he brings this comment up every couple of weeks :-)

Yep, seen it many times. However given a key aspect of this discussion is about  funding ChCh's recovery and the less informed might start believing him, I felt it's time to reply. Job done. Cheers, Les.

The scariest thing now, is not so much talk about QE, but that every man and his dog thinks he is a macroeconomist.

I dont see how, every man and his dog doesnt have the reigns of "power".  What it does mean is good, now every man and his dog is armed with the information to make "good" decisions and that includes voting.

Eaqub, who on other matters I often respect, does not appear to address the current account problem that is driving much of the talk about lowering the exchange rate. He does not apparently like Swiss type money printing, which I think the Greens proposal is more or less, albeit the Swiss stiill have a massive surplus. The Swiss print to buy foreign assets (or in our Greens case, to forego borrowing further foreign money) with the sole objective of keeping their currency at a level where their productive industries can compete. Although they have effectively got to zero interest rates first, I don't believe that is essential to achieve the desired outcome.
We don't need to stimulate mmore demand, soo loowering interest rates may not be the answer per se.
Yes there will be an element of inflation driven by the lowering of the exchange rate, but not by any increase in money supply, as we would merely be replacing foreign money turned into NZD, with NZD directly.
To ever get even close to solving the current account, the price of imported goods and services wiill have to increase relative to domestically produced prices. That can either happen with deflation of local prices, and costs, and wages; or with inflation of imported costs. We have a $200 million a week gap to fill. Yes there will be some loss of living standards in the short term; that are currently being paid for with borrowed money, or selling assets. In simple terms, going with IMF suspected elasticities of supply and demand; you might expect in the short term say a third of the $200 million to be met with less consumption; a third to be met with increased local production and service provision; and a third with lower investment transfers offshore. Over time that balance should move even more favourably.
Most poor peoples' consumption is largely locally sourced rent, food (some of which is internationally priced, but much of it not), public transport, highly depreciated cars- and yes some petrol. It is the wealthier among us that would take the bigger hit (with more imported toys, new cars, overseas travel etc); and that would seem socially best.
If there was a 20% devaluation; (as the UK had against their trading basket) you might expect inflation of 5% (as again, the UK had). Low end wages can be raised by 5% to compensate. Industry remains 15% more competitive.
So Mr Eaqub, presumably you agree that high cumulative current account deficitts equal a massive debt or loss of wealth in terms of assets. How would you solve that problem otherwise?

"stimulate for more demand" no I agree we dont, if we did we could lower the OCR anyway.  The driver here is the rest of the world is a basket case and we export to them.....we are just along for the ride IMHO.
Lowering the NZD would make imports pricier except of course its a race to the bottom.....however I cant see how we can appreciate further.....taht takes ppl buying NZD and unlike the swiis we are not a safe haven...
Interesting to watch.

Yes Mr Eaqub offers no solutions just highlights perceived problems that are not certainities.

Yes Mr Eaqub offers no solutions just highlights perceived problems that are not certainities.

StephenL, what are you going to do about this problem
The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008

Agreed, you would have to change the status quo, also poltically, high exchange rates allow the overseas trips, new Europeans cars and other imports which is the icing on the cake over and above the property set up, be it residential or farming which exists for the key voting block.
It is a fight against the status quo so all the economists are working for their salary for now...

This profit is very high indeed, as you note. Even then I suspect it is under reported with even more profit made in their forex dealings in OZ or offshore.
Am willing to concede I could be overstating my expertise on international finance, which is as an observer from the outside, rather than a real inside knowledge.
But if the money printing or other intervention that is being discussed occurred, then the NZD immediately becomes unattractive as a trading item (a good development). So that profit stream would diminish.
If we also said thanks but no thanks to euro bonds and other similar trashy items that are really about making banks and offshore investors profits, and inflating bubbles, than doing anything useful for NZ, then another billion is saved.
I'm perfectly happy that the banks make reasonable profits for running NZ's financial plumbing. But no more.
Other exporters into NZ have I suspect made super profits out of trading and an inflated exchange rate. Those would come back by 30% or more with a sensible devaluation. Many imported products I believe are priced to the market; and not on a cost plus model. (Think luxury cars; and some electronics). So those products' prices would not increase proportionately in my view, or the suppliers market shares would collapse.
And pay off some of the debt with new NZ funds, and our interest rate cost goes down
So transfers on investments would certainly drop after a devaluation. That would mean that any consumption drop necessary to balance the current account could actually be fairly minimal.
Hope that answers the question; and hopefully in a way that makes sense.

It's a hot topic...thing is I am sure Norman knows his call is pure loony waffle but Norman is after voting support and he is aware of the fact that heaps of Kiwi voters are driven to grasp at promises of utopia...should the pinkogreens get an office in the Beehive basement beneath Shearer, Norman will change his tune.

Quite an interesting article from the Economist here on currencies and monetary policy that concludes: "In short, foreign-exchange markets no longer punish things that used to be regarded as bad economic behaviour, like high inflation and poor trade performance. That may help explain why governments are now focusing on other priorities than pleasing the currency markets, such as stabilising their financial sectors and reducing unemployment. Currencies only matter if they get in the way of those goals."

Can anyone tell me how the new zealand dollar is really established without copy and paste 

Those at the top of the food chain decide its value. You dont get to know who, although one could guess.

Its actually quite simple. Money, all money, is an accounting entry. When some person, some business, some bank, or the government borrows money from a bank, or central bank and spends it, then this action creates more money. 
The reason this creates money is that nobodies spending power is reduced when somebody borrows the money this way. This is not true when a non-bank lends money because the lenders spending power is reduced.
Is that what the question was?