By Gareth Vaughan
New Zealand Debt Management, the Treasury unit responsible for managing the Government's debt, isn't seeing any notable increase in demand for its inflation-indexed bonds despite high inflation both in New Zealand and overseas.
Speaking in interest.co.nz's Of Interest podcast, Kim Martin, Director of New Zealand Debt Management (NZDM), says you might expect more interest in inflation-indexed bonds when inflation is high. Statistics NZ releases its Consumers Price Index for the March quarter on Thursday, which is expected to show inflation above 7% for the fourth consecutive quarter, at a time when there has also been high inflation overseas.
"Inflation indexed bonds have a coupon that is indexed to inflation so the value of your regular coupon is protected against that high inflation period...We have seen our inflation indexed bonds outperform their generic equivalents over the past couple of years, but we haven't seen any significant change in demand," Martin says.
"We've heard a few rumours about retail demand for inflation protection products, but we really haven't seen anything that's of particular note, which is quite interesting when you think about how topical inflation has become in recent times."
In the podcast Martin also talks about the impact of the Reserve Bank's quantitative easing, through which it bought around $50 billion worth of NZ government bonds, on the bond market and what might've happened without it.
She also talks about how NZDM borrows and repays money, what options it offers for retail investors, how borrowing decisions are made, whether you can trace proceeds from individual bond issues to government expenditure, what currencies NZDM borrows in, who it competes with for investor interest, the importance of registered tender counterparties, the value of strong sovereign credit ratings, and the key risks for NZDM.
21 Comments
Have a read of this, Gareth; slowly and without pre-assumption:
https://consciousnessofsheep.co.uk/2023/04/18/stagflation-has-begun/
'The problem with the somewhat schizophrenic policy response – central banks trying to stem the money supply even as governments are borrowing and spending even more – is that it is based on ungrounded economic theories that assume the economy to be entirely monetary.'
'In reality though, inflation is always and everywhere an energetic phenomenon, since, with access to sufficient, low-cost surplus energy, there is always enough productive capacity in an economy to absorb the excess currency that states and bank borrowers spend into it.'
I disagree - productive capacity produces real stuff, for real consumption.
The rest can only inflate bubbles-in-waiting, given that the rest cannot find a home buying stuff to consume (too few chairs when the music stops). Thus we've seen house prices (I'd argue; on, and on, since the 1970's) and everything from Ford Falcons to shares - inflated. Nowhere else for it to go.
Economist don't get this at all - I've just read a Krugman book (a compilation of his op/ed columns from 1998-2005) and it's rubbish; he's tea-leaf reading while castigating other tea-leaf readers. Nuts - highly intelligent but no idea.
What?
How many $'s just get soaked up by pointless go nowhere corporate types?
How many $'s get soaked up by repetitive tasks? e.g. NZ building homes, turns out quite a few are leaky, so the same house gets have stripped or fully demolished and re-built. That's not productive is it?
I see where you go wrong.
Corporate types, like everyone else, don't 'soak' up proxy; they put it where they think it will advantage them; status-symbols or ' investments'. Who does it is immaterial; the problem is too much proxy and not enough energy/NNRs; when the music stops...
Repetition is indeed a waste - but not of money. As we've seen, you can print indefinite amounts of that. It's a waste of the remaining energy, and by association: Time. Most of the infrastructure predilected in a fossil-energised world, which in hindsight will look like the biggest waste we ever indulged in. By some orders of magnitude.
I'll keep going with this.
The quote from your linked article in your first comment is,
'In reality though, inflation is always and everywhere an energetic phenomenon, since, with access to sufficient, low-cost surplus energy, there is always enough productive capacity in an economy to absorb the excess currency that states and bank borrowers spend into it.'
I'm saying that it shouldn't just be limited to the productive capacity in an economy to absorb the excess currency that is spent into it. Any where with a monopoly stranglehold within the economy (including government, local and central) will just chew up the excess currency. Easily. Some of it will produce useful stuff. Some not so useful stuff. Some productively. Some not.
I mean the capitalists will argue that capitalism is a system that allocates capital ($, energy, resources, whatever your widget is) efficiently. Those that can't will disappear.
But to what ends? To provide a social good? To enrich some? To crush others?
Maybe I need to re-read the quote in a different context that I haven't considered.
Yes, you do.
Without money, all biodiversity - including us - can live (if we're not an overshot population). Life is food; food is energy.
Never conflate $ with energy - they are NOT capable of being put in the same category.
It's slow going, eh? How many of my links today, have you read? I mean, read? Not skimmed with an intent to dismiss...
You have to factor in peoples propensity to save, if they have more money than they need then they will likely just save it and NZ also runs a $30 billion annual current account deficit which is a net loss of spending power from the economy. Sectoral Balances, (S-I) = (G-T) + (X-M).
Pretty sure that ACC (basically a Govt savings fund) own a good chunk of the inflation-indexed bonds. RBNZ also bought some when doing LSAP. I love it when Govt pays interest to its wholly owned subsidiaries - it's one of the reasons that in most years Govt receives more interest and dividends than it pays out on its bonds.
RBNZ also bought some when doing LSAP. I love it when Govt pays interest to its wholly owned subsidiaries.
QE is an asset swap.
Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations. - courtesy of Hussman
Treasury is obliged to continue paying the coupon on QE government bonds (asset) held by the RBNZ to finance corresponding floating rate bank reserves (liability).
A very good read from Croaking cassandra this morning on the bonds, payment and losses incurred.
Ques-inflation indexed bonds. In the US these are offered but the amount that can be purchased is nominal and protection against inflation is capped to the short term i.e. you couldn't buy $100k of 10-yr T-bonds inflation hedged. Pse correct me if wrong (and restricted to holders of US Social Security numbers).
Treasury Inflation Protected Securities (TIPS) maturities
Treasury Direct can probably answer your question about purchase eligibility.
Genuinely interested to know where you think the money comes from to run a deficit for as deep and as long as the majority of developed countries do?
The overwhelming need for tax is to balance the economy and help prevent inflation. It can also be used to influence societal behaviour. Such as disincentives for productive work, and incentives for paying the bank interest.
Governments create currency, banks can also create currency on behalf of the government. Money doesn’t start in your pocket.
$60 billion net government debt to $130 billion in less than six years.
True. That's doesn't sound good.
But how about private debt increasing? I think in the last 3 years mortgages grown by 250billion (if I counted zeros correct)
So a balancing act of govt debt was needed sometime; so that everyone can get a share of good and bad of increasing overall debt.
The government doesn't borrow and spend, it spends first and then it borrows, it cannot borrow back its own NZ Dollar Currency before it has first spent it into existence. Borrowing is only an accounting convention which says that the Treasury must issue bonds equal to any budget deficit and its also a form of double entry book keeping, with a balance showing in the treasury's account matching any balance of central bank reserves on the Reserve Banks balance sheet. Borrowing also helps the central bank to maintain its interest rate target.
Economist Steve Keen explains this here using his Minsky software. https://youtu.be/WtO8cGww_dA
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