The Government’s commitment to reducing net debt to 20% of GDP by 2021/22 has again come under fire this week – is the issue that it’s debt target is a bit too specific?

By Jason Walls

Moody’s and S&P are both fawning over New Zealand.

It seems the credit rating agencies can’t say a bad word about our small island nation at the moment.

Low unemployment, high GDP, stable monetary policy, very low corruption – we tick all the boxes.

And it’s not just our economy, they’re happy with the Government – especially its debt levels.

At 21.6% of GDP, New Zealand’s sovereign debt is low, much lower than our international peers and it's only getting lower.

Despite this, Finance Minister Grant Robertson’s commitment to getting net Crown debt to 20% of GDP by 2021/22 has come under fire this week.

Bagrie Economics' Cameron Bagrie has joined fellow economist Shamubeel Eaqub in calling the commitment a “fiscal straight jacket.”

On Monday, Prime Minister Jacinda Ardern said the focus of Budget 2018 will be on fixing an “infrastructure deficit” left behind by the previous Government.

Because of this, the Government won’t be able to deliver all it had once hoped to at next month’s Budget, she said.

In defending the Government’s decision not to alter the debt track and borrow more to cover the costs, Robertson’s main point was it’s important New Zealand has a buffer, if an external or internal economic shock were to occur.

But, as pointed out by S&P's primary New Zealand analyst Anthony Walker this week, just 10% of the rating agency’s entire credit rating assessment is Government debt.

If it were a few percent higher, it would do very little to S&P's AA/A-1+ foreign currency and AA+/A-1+ domestic currency ratings on New Zealand, he told me.

Bagrie agrees; - “The difference between 20%, 25% or 30% of GDP is not going to make one iota of difference to long-term borrowing costs,” he says, adding that the rating agencies are already very happy with New Zealand.

More flexibility needed?

The Government’s commitment to lowering debt is by no means a bad thing – but perhaps it’s the lack of flexibility in the debt target that is the issue.

Robertson’s commitment to a number and a time leaves very little wiggle room for the Government.

“Fiscal discipline is to be admired but you have to be careful you don’t place yourself in a fiscal straightjacket – which is what they have done,” Bagrie says.

Flexibility is by no means unprecedented – the Reserve Bank is mandated to keep inflation between 1%-3% “over the medium-term” and to keep a target of 2%.

Its new employment mandate has the very non-specific and flexible objective of “supporting maximum sustainable employment.”

Is there scope for the debt targets be the same?

It seems as if it’s too late now – Robertson is clearly sticking to his guns and the debt track is unlikely to change.

But, as Greens Co-leader James Shaw pointed out this week, it has always been the Government’s intention to review the Budget Responsibility Rules during the first term in office.

The challenge for Robertson will be, can he satisfy his “fiscal straightjacket” critics while making sure Moody’s and S&P continue to fawn over New Zealand?

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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82 Comments

Copping.
Or Freudian slip - coping.

Of course it is a ridiculously stingy policy. Like starving your kids to pay off the credit card a bit faster. Or letting the roof on your rental property get rusty and not borrowing to replace it in order to not go into any more debt (leading to much bigger costs when the house starts to rot). Self-defeating. Investment in education, infrastructure and health and well-being now will create a populace and economy that is more productive in the future. But Robertson wants people like me saying that. Because it makes him look tough and prudent and conservative. Sigh.

Agree. This country's infrastructure (including education and health) is falling apart. We need some heavy investment, and that means more debt and/or more tax revenue.

If it is infrastructure then it should be debt.

I don’t understand why this statement is considered true by so many people. First, must infrastructure doesn’t appear to break even on a cost benefit basis let alone produce a return.

Second, but more importantly, present generations inherited infrastructure from earlier generations without the debt. Why should this generation get to build their share of the infrastructure with the debt rather than pay for it?

The current generation uses infrastructure financed by deficits past. The future generation will use new infrastructure financed by deficits present and no doubt build their own with future deficits. Should the US not have fought WW2 due to the debt burden on future generations (which was soon "grown away")?
Imagine the NZ economy with no public schools, universities, roads, airports, ports, hospitals, hydro dams, electricity networks, sewers, street lighting, research, courts...... there would be no thriving economy without those things. Private markets need those things in place to make any profit. Perhaps you are a libertarian that thinks these things would be provided well for all citizens by the free market. I doubt it very much. If public infrastructure is such a dud why do private companies line up to buy it so assiduously whenever they are privatised???

‘The current generation uses infrastructure financed by deficits past.’

Im sceptical that this is balanced keeping in mind the fluctuations in debt and the fact that over the last 20-30 years the population bubble has sat in the working age population. If it’s true how do you calculate how much of GDP each generation should add in debt funded infrastructure?

‘Should the US not have fought WW2 due to the debt burden on future generations (which was soon "grown away")?’

This is a silly logical fallacy on several levels - not infrastructure and clearly a straw man.

‘Imagine the NZ economy with no public schools, universities, roads, airports, ports, hospitals, hydro dams, electricity networks, sewers, street lighting, research, courts...... there would be no thriving economy without those things.’

Again, a straw man argument. I questioned whether infrastructure should be funded by debt as a matter of course. I just think each generation should pay for what is required rather than kicking the can to future generations.

As for the libertarian. I have mix of views on different issues but as stated above I fully support the government providing infrastructure and social services, just not by debt as a matter of course.

Easy solution - don't issue public debt at all. Use overt monetary finance for the fiscal expansion. Fine as long as there is slack in the real economy to be mopped up. Pay interest on reserves for monetary operations if you must or let interest rate fall to zero. Public debt is just corporate welfare for bond holders. Look at Japan.....pretty damn good infrastructure there - much better recovery from earthquake. BOJ owns a very big chunk of the public debt and shock horror, low inflation..

Easier solution, no one issues debt. That way we can stop repeating mistakes and backing us into the same corner.

No debt = no interest bearing savings. Because every dollar that someone saves is someone else’s debt.

Really Sadr? Surely money can be invested to produce a return without it having to be issued as a loan? I suspect this debate is about semantics, but a bank, or individual investing in a IPO, or buying shares period is investing in a company that, if run well, will deliver a positive return.

I knew a local businessman who had built his business up over a period of years without having to resort to a bank debt. He was somewhat amused that on a monthly basis, his bank manager would rock up and try to talk him into borrowing from the bank, at extremely favourable rates of course. The refusals did not deter the bank manager. I suggested that instead he offered to sell the bank shares in the business, less than 50% and of course at an extremely favourable share price. He thought this to be an amusing suggestion too. A while later he said he had raised the possibility with the bank, and had been told that it was not the way they did business!

Perhaps we should seek to change the way our banks do business?

Difference between Interest on a Loan and Dividends on a Share? Difference only in name, one is debt the other equity, both are liabilities to the business and both pay an amount to the holder.

So you want a fixed money supply with no credit creation and deflation of prices and wages to accompany economic growth? No smoothing consumption over the lifespan, no investment in innovation that isn't 100% financed by pre-existing money? The Austrian paradise? The fact that my business loan may be worth double in a year's time due to deflation won't discourage me from borrowing and being entrepreneurial?
Human beings have always used debt to conduct economic affairs. The barter idea or the gold idea is largely false anthropologically. Credit and debt is how economies function and grow. However, it needs to be constrained and regulated - like a public utility - so that it oils the machine and doesn't break the machine.

The problem with debt is that it allows politicians to sweep today's problems under someone else's rug. If they didn't have the option of debt funded infrastructure the public might actually get angry about mass immigration and hold the beehive to account.

Not only does debt pacify public outrage but it also a theft from future generations of New Zealanders.

The argument goes that the debt is used on high ROI projects that will pay themselves off quickly. It doesn't seem like this is happening though. Councils love spending on dumb white elephant stadiums, enclosed swimming pools, resurfacing roads and parks nobody uses etc while the beehive love to toss out lolly scrambles to boomers, landlords and students (anyone who doesn't pay much tax!).

If Labour really cared about having a productive economy they would have put in a land tax already to direct capital towards productivity.

Don't forget about the huge debt that the councils have got themselves into, particularly Ak. Wouldn't be surprised if it needs to be bailed out by the govt when interest rates go up.

Nah let the Jafa's pay for their own debt

Aucklanders are a poor, over-indebted and impoverished lot with lower wages than the rest of the country, after all. So it is only fair that we help them. Not.

Sigh. Such lazy thinking. When the decisions are tough lets immediately jump to the easy stupid solution. Lets borrow !
There is a difference between productive debt and malicious debt. Plenty of explaination of that right here on interest.co. Look it up. And even this article sees the current nz low debt (relatively) as productive for us.
If we want more lollies than we have cash for, lets decide to get richer. Investing means increasing ownership, not borrowing to keep up a fragile lifestyle.

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Agree. Those of us that are fiscally responsible in our own lives have a thought process that allows us to distinguish want from need. Governments unfortunately are voted in or out by those that haven’t learned the same discipline.

Never a truer word hath man spoken ;) . Maybe include a math test equivalent to Cambridge A levels at polling stations, permitting only those who pass to vote? Surely having smarter voters only would result in smarter politicians being more likely to be voted in resulting in more national prosperity?

To me it looks more like an ideal that bears little relation to reality - when considering the choice of the two main parties in the last election. The primary difference seeming to be National prefers deferred maintenance for the appearance of a near-term "surplus". Do we call someone who defers necessary maintenance on their car financially responsible?

National was also running on increasing redistribution to Working for Families, the Accommodation Supplement and the First Home Buyers's grant - socialist mechanisms that subsidise company wages, drive up rents, and get capitalised into property prices.

Hence, while it feels like a reasonable basis on which to distinguish Labour and National, I see precious little substance in that basis.

National and Labour are both heavily socialist parties with slightly different favourites.

Political parties need to pander to the voters of which half are below average intelligence, where apparently bribes work well. To use your analogy, where a fiscally prudent individual would choose a base Corolla, a spendthrift party promises an HSV Holden and then we wonder why we can't afford the upkeep. Spend within our means, from personal experience it works.

I agree with fiscal responsibility (notwithstanding the well-analysed role of government debt and its differences from private debt). I just don't hold any particular illusions about National being stellar at it and Labour being terrible at it.

Even if there were an HSV-Corolla difference between the two (clearly not), it doesn't make not maintaining your Corolla a fiscally responsible decision.

So if households are belt tightening and refusing to borrow more on houses, businesses aren't borrowing to invest much and we have a current account deficit - all three forces sucking money and demand out of the economy, who is left to invest? Who is left to keep up aggregate demand? Government.

Alternatively government too can suck money out of the economy via surpluses. Good luck with that "growth strategy".

did it ever occur to you cs that if government did not suck the cash out of the pockets of the battlers, and left it there, the battlers would spend it and demand would be supported.
And further they would make far more sensible decisions than the bureaucrats, and get more bang for their hard earned buck. They would invest better as well, and not blow it on the fripperies like stadiums etc, that the soft target funders fall for every time. That is central and local government both.

Really? I keep hearing from right leaning common taters that the battlers will just spend it on Woodstocks, Rothmans and the pokies at the pub.

In fact that has actually occurred even to my admittedly very little brain KH.
One way to deficit spend is to lower taxes. And indeed tax cuts for low to middle income earners are potentially a very good, equality and demand promoting thing (tax cut to richer cohorts more likely not to be spent).
G-T <0 is deficit spending. You can deficit spend by either spending more and keeping tax the same or keeping spending the same and cutting tax. Or various combinations that result in not sucking money out but putting money in. These are political choices about the relative size of government in the economy.

But I would support a tax cut to low and middle income earners as well as some increased infrastructure and public sector spending. The boost to demand and growth would ultimately "pay" for the deficits.

if government did not suck the cash out of the pockets of the battlers
The government? What about so-called the exposure of "battlers" to unfettered market forces? (aka crony capitalism) When in Sydney last week I noticed that milk cost $1 a litre. Half the price it is here for a basic food commodity.

Was reading through windflow’s financial statements the other day. Looks like a venture capitalist took all the UK assets and majority of the company shares to settle about 20m of debt. The company has IP, (had) overseas revenue and staff. Just a thought, but a mercantilist country like China would just make them solvent with a zero % interest loan. Wasn’t that the point of ZIRP and NIRP to give future growth companies a leg up. Rio Tinto got bailed out at Twai Point, although more jobs involved there. Would be nice to invest in something other than a housing bubble.

They had enough money to pay for the first year of all new student’s arts degrees, but they don’t have enough for essential services?

How did National have enough for the biggest health budget in New Zealand history without even needing a new fuel tax?

Because they were cutting health spending as a percentage of GDP and spinning the small increases as something other than what they were.

You know in calculating funding increases under National the process was to figure out what the sector needed and deduct an ‘efficiency’ factor that DHBs were charged with find. Guess how they found it?

“Deferred” maintenance.

How is health spend as a % of GDP relevant to anything? To my layman’s understanding if we enter an economic boom which doubles GDP over a year, that in no way means that we need to double health spend...

Because it represents the proportion of our available economic resources we are dedicating to something. If we are reducing the percentage we are reducing the priority we are giving to health.

Dramatic Foreshadowing. With orders or signalling from 'on high' the usual suspects try to justify the massive overspend and borrow that the Coalition will be needing to pass in the coming budget? We are currently in the make hay part of this economic cycle where we should be preparing for darker days that will inevitably come, not wasting money on hobby horses (student bribery, killing off huge productive industries for no benefit, ultra-low benefit/cost public transport projects).

The dark days are already here. Loan growth (edit private) is slowing at it’s fastest pace since the GFC. If you believe Steve Keen then the government should be injecting cash into the economy to prevent a recession. The neoliberal straitjacket of small government has been repeated ad nauseam by the media, and unfortunately adopted by the current government.

That's correct. Steve Keen refers to private debt as the problem, not public debt. And if anyone who understands the current monetary system, then they will realize that its retail banks who are largely responsible for destabilizing debts. Govts cannot go bankrupt and this preoccupation with its debt is ridiculous.

"Govts cannot go bankrupt and this preoccupation with its debt is ridiculous."

Tell that to Greece?

They wanted to go bankrupt but the Germans didn't allow them to.

Governments that issue their own currency and have floating exchange rates cannot go bankrupt. They can create inflation, but cannot be insolvent.

"not wasting money on hobby horses (... ultra-low benefit/cost public transport projects)."

Yes, that is why the government killed off the Roads of Notional Significance.

Low interest rates have lured us into a false sense of security when it comes to borrowing. We have 550 billion of debt. If interest rates rise we could have a banking crisis. A lot of debt has been used to speculate on non productive assets which have pushed rents up eroding peoples disposable income.

Governments are inefficient spenders of money, however we still have a long way to go to fix the leaky buildings, we were told at the time would turn into the most expensive disaster in our history.
Who caused the leaky home disaster? The National party meddling with building codes and allowing substandard materials, politicians and Bureaucrats with 'no skin in the game'.

Governments should borrow money when interest rates are low to fund big jobs.

Why should governments borrow with interest, why not just spend the money into existence?

Why should governments borrow with interest, why not just spend the money into existence?

Exactly. Say that at the BBQ and you will get all kinds of strange looks. The irony is that money is being "lent into existence" through the retail banks. Even if the BBQ attendees understood what that meant, chances are they would argue why it is benign relatively to a govt creating "funding."

Not at my BBQ JC!. At my BBQ your question would be answered with "indeed, why not!"

People are slowly getting the reality of endogenous money and that overt monetary finance doesn't necessarily cause hyperinflation.

J.C and cs. I’d give you both a strange look. Creating money like that is just another tax! Devaluing our savings instead of taking it from our pay. Plus imagine how much money would be created if politicians could just create it. Not sure if that’s funny or terrifying.

J.C and cs. I’d give you both a strange look. Creating money like that is just another tax! <./i>

No it's not.

Devaluing our savings instead of taking it from our pay. Plus imagine how much money would be created if politicians could just create it.

What are you saying? Money is being created constantly. It doesn't come from your bank account and / or savings.

Correct, money is being created constantly hence why we have inflation. Inflation decreases our purchasing power. The money in your account can’t buy tomorrow what can today and by allowing government to print what they want would exacerbate this. Rather than taking it, gov is just devaluing what you have which equates to the same thing (and in some ways money creation is more negative than tax).

Money is only as valuable as it is scarce, scarcity principle. Otherwise Zimbabwe would be the richest country in the planet! Hope this explains why inflation is a tax, if not try this: https://m.youtube.com/watch?v=x5WkNxbvLFc

Correct, money is being created constantly hence why we have inflation. Inflation decreases our purchasing power. The money in your account can’t buy tomorrow what can today and by allowing government to print what they want would exacerbate this. Rather than taking it, gov is just devaluing what you have which equates to the same thing (and in some ways money creation is more negative than tax).

Really? Why not use the examples of the US and Japan instead of Zimbabwe? There is no doubt that there is a relationship between the money supply and inflation, but we also understand that there is a relationship between public surpluses and private debt. Budget surpluses are required only when the economy has excessive aggregate demand, and is in danger of inflation.

I’ll try a different tact.
example 1) you earn $100 per year, the government taxes 10%, you have $90 left to spend.
Example 2) you earn $100, the government prints money instead of taxes, raising the price of goods/devaluing your pay (inflation). Even though you still have $100 it now only buys you what $90 would have at the start of the year.

Overly simplistic but if we were to look to the US ( Japan is almost a law unto itself and while the US is in some ways protected by the petrodollar it will suffice for this example), there is an “everything” bubble. By printing money they have inflated the stock market to rediculous levels (whenever there is inflation your purchasing power is reduced and again, it is acting like a tax), house prices are overvalued for two examples. As asset prices increase, the cost of production increases and we see the traditionally thought of inflation of prices at places like supermarkets etc. Where people get mixed up is there is often a lag between money creation and inflation as it needs to filter through the system whereas tax is instantaneous.

I think my explanations have been a bit rubbish tonight so if that doesn’t answer it I’ll flip the question; What do you think would happen if the government had free reign to spend money into existence? What are the previous examples of this historically and how did they work? What effect did they have on citizens purchasing power?

I think my explanations have been a bit rubbish tonight so if that doesn’t answer it I’ll flip the question; What do you think would happen if the government had free reign to spend money into existence? What are the previous examples of this historically and how did they work? What effect did they have on citizens purchasing power?

All govts with sovereign currencies have a "free reign" to spend money into existence. Let's take the example of Japan. 70% of JGBs are purchased by the BOJ. Public debt is running at 2xGDP. Furthermore, when SHTF, JPY behaves like gold (probably good you google that phenomenon) while NZD and AUD (currencies of countries that are praised for their govts' low public debt).

Where is the inflation boogeyman in Japan?

“All govts with sovereign currencies have a "free reign" to spend money into existence.” - Maybe this is the stumbling block, Japan doesn’t spend money into existence the borrow it into existence. Hence why we talk about their debt (over one quadrillion yen even back in 2013). While the are cancelling some of their debt (approx 80 trillion yen per year) they still can’t get their citizens to buy anything creating inflation as the whole program was created to achieve hence why I said they are a law unto themselves. This system hasn’t improved anything for Japan. Here is an excellent and humourous presentation from grant Williams which will give more insight into debt and Japan: https://m.youtube.com/watch?v=fNvivEKPmpc

Finally, how about this regarding inflation:
- if the quantity of goods stays the same and money increases, price will go up
- if the quantity of goods increases and money stays the same, prices will go down
- if the quantities of both goods and money both increase together then prices stay neutral.
This last example is how inflation can be hidden however if money wasn’t created then the price would go down in that example and you could by more with your money (more purchasing power is like less tax as I’m trying to get at).

If the economy is going at full tilt, everyone is employed doing overtime (not 11% underutilisation as we have in NZ), all productive capital is exhausted, the economy is overheating, excessive government money creation will create inflation. No doubt.

If you decimate your supply side (Zimbabwe and its farms) or lose half your industrial territory with crippling international reparations (Weimar) and print money you will have inflation.

However, if you have slack in your economy, idle labour and a lack of demand, overt monetary finance of fiscal expansion will first and foremost increase OUTPUT and employment. Businesses don't want to raise prices and lose market share, they'll simply produce more to meet the demand. Excessive deficit spending will cause inflation - not default on public debt. But sensible ongoing deficits are what many countries like NZ need to offset their current account deficits and the private sector's desire to save.

Moderate, small inflation is much better than deflation. Deflation depresses demand, encourages cash hoarding and pushes up the value of debt.

Looking at NZ as it’s the banks which create the majority of our money we have had high inflation in the sectors they create money/lend on with the biggie being housing. If you are measuring inflation by the CPI then I can see how you’ve come to that conclusion. Here’s a Forbes article titled “If You Want To Know The Real Rate Of Inflation, Don't Bother With The CPI.” https://www.forbes.com/sites/perianneboring/2014/02/03/if-you-want-to-kn...
This takes longer to filter through to measures like the CPI but is inflation none the less and drastically reduces what our savings can buy when it comes to housing.

Interest rates are the mechanism to remove money from the economy when inflation rears its head. With the initial suggestion of governments creating there own money (rather than borrowing it) there would be no recourse to pull it back hence my worry.

Your examples used above seem to me to be mostly based around increase in goods/services and increase in money therefore no inflation. But again, if there was no extra money was created those goods and services would cost less so we still are having inflation although it may not be as obvious.

Low interest rates along with lax financial regulation, bad taxation policy, poor fiscal policy (lack of social housing) and QE have definitely inflated house prices. Agree. The high household debt levels have had a large impact on disposable income and demand. With incomes and inflation not rising much, the debt burden is heavy. Near deflation makes the debt burden much worse.

If the economy is going gangbusters and the private sector is full to the brim with spending and demand, true full employment etc then raising interest rates will temper it somewhat (though it gives savers a whole lot more money to spend) but cutting the deficit and increasing taxation will definitely take the wind out of its sails. Fiscal policy is a much better way to moderate inflation than lowering/raising interest rates. And it can be targeted - i.e. increase taxation in inflating sectors or targeted spending to increase supply in inflating sectors and remove bottlenecks (i.e. build houses, train carpenters). Interest rates are a blunt tool and their use to supposedly rescue us from the GFC has only worked by encouraging further private debt. Fiscal stimulus would have worked a lot better.

Finally you say "if there was no extra money was created those goods and services would cost less so we still are having inflation although it may not be as obvious." - If there isn't enough money created (norminal demand increased in a slack economy) the goods wouldn't be produced in the first place!

Just to confirm, your aware that when a bank creates a loan, the money never existed before, it is created out of thin air so to speak?

“QE have definitely inflated house prices” again creation of money leading to inflation and devaluing you purchasing power. (I strongly agree with you on the other factors for house price increases btw with the possible exception of social housing).

Regarding economic activity, you can only hide inflation for so long and then interest rates need to be increased to stop it so it’s always there, there is just a lag.

“If there isn’t enough money created the goods wouldn’t be produced in the first place!” I disagree. Money is a convenient form of barter. Money doesn’t create demand by itself, the demand is already there and if more money wasn’t created the money we have would be able to purchase more.

We run a system where monatary policy tries to influence and effect where money goes/tries to control decisions as to how the government of the time sees fit at the time. This is wrong, our money should be sound and constant. It’s like adding centimetres in a metre. We have changed what was used to measuring value to something that is in constant flux.

Finally, I appreciate you taking the time to go back and forth. We obviously aren’t seeing eye to eye so thank you all the more. It’s great to test ideas and see where and if I’m falling short.

Lovely debating - it sharpens the wits!

1. Yes I am very aware of endogenous money. Loans create deposits (rather than being dependent on them).
2. QE has inflated asset prices full stop. That is how it's supposed to work - creating a wealth effect trickling down to all. Unfortunately it doesn't trickle down much at all and increased bank reserves has not stimulated investment in the real economy. A "helicopter drop" to low and middle income familes would have been better - as they did in Australia early in GFC.
3. Everyone goes on about this "hidden inflation" lurking somewhere in the ground maybe about to explode forth - but somehow it just doesn't appear......the lag is becoming a very long one.....or the theory of inflation might be wrong???
4. Money is not a veil. It is a thing in and of itself and woe betide those who make models that don't account for this. Otherwise why would people hoard cash in deflations? Why aren't they rushing out and buying lots of cheap goods?
5. If you lose your job tomorrow, your income is going down and your demand is going to fall. If you get an unemployment benefit, your demand won't fall as much keeping Mr Smith's butcher, baker and brewer in business. You assume prices and wages will automatically fall in line with money supply and all will be well. Mr Keynes showed otherwise.
6. If money were sound and constant we'd have to accept continual deflation. Which means the debt burden gets more and more onerous. The gold standard (and bitcoin) are not sound ways to run economies. Gold bugs however do their best to convince us all otherwise .
7. If you believe that massive inflation is about to sweep Japan say due to high debt to gdp I suggest you go out and short JGBs. The widowmaker trade they call it.
All the best!

To revert back to the initial disagreement quickly, inflation is a tax - 2. “QE has inflated prices full stop” this is it! Your money now purchases less just as if the price had not been inflated but your money had been taxed. I really hope that gets the initial point across? Also, I know the effect QE is supposed to have and I think it’s hideous, buy up bad debt to stave off collapse (created by money creation) then destroy people’s savings until they are forced to spend to stimulate the economy.
3. I hope you watched the Grant Williams link I posted? It covers this nicely especially Japan much more eloquently than I can. Also, interest rates are used to keep inflation in check and remember that you said that the government should be able to spend money into existence which interest rates wouldn’t be able to effect as efficiently increasing inflation.
4. One of the definitions of money is “means to save or store purchasing power”. I guess we no longer have money and to be correct I should say currency or fiat
5. Mr Keynes in a large way is responsible for this mess the world is in. I tried to use simple explanations to explain a complex system, it won’t work exactly how I say but it will and has gone that way.
6. If money was made sound right now then yes debt would be a major issue as we rely on inflation to erode it. If the Chicago plan was enacted (or a debt jubilee) and then we went to sound money it wouldn’t as we would be much more prudent about it. Goods are meant to get cheaper, we will still buy. Phones will come down in price in future but I need one now for example, it would help especially the poorer of any country if this was the case.
7. As I said, Japan is a law unto itself. Please check out the video, it’s 30 mins long approx but very entertaining and I would honestly love your opinion on it.
All the best to you too.

So when will those loans be paid off? After the interest rates rise? Probably can't because interest payments will precipitate a downwards spiral.

Just let inflation wipe some of the debt out. Painful but.
How many Government's have ever really "paid" anything like their actual debts off... anyway?

Jim Grant

"[There is] one essential monetary idea [in this world]. That idea is that central banks can and should manipulate – override – the price mechanism… I think this idea is a worldwide idea, but it had its genesis in the United States. Ben Bernanke was an early proponent of it. The idea is that you put the cart of asset values before the horse of enterprise. By raising up asset values, you mobilize spending by people who have assets… It was otherwise known as trickle-down economics before the enlightenment, then it became something much fancier in economic lingo. But that’s essentially the idea. So what you have seen is an artificial structure of prices worldwide.
“The prices themselves are the cosmetic evidence of underlying difficulty. So if you misprice something, it’s not just the price that’s wrong. It’s the thing itself that has been financed by the price. So you have perhaps too many oil derricks, too many semi-conductor fabs. We have too much of something, which is financed by an excess of credit or debt. That, to me, is the essential backstory to this morning’s difficulties. It’s the mispricing of asset values, led by central banks who think that by inflating or lifting up stocks, bonds, real estate, they will thereby engender prosperity
Mispricing of debt does two things. It pulls demand forward, and it pushes failure out. So the junk bond default rate over the past 12 months has been the lowest in the 40-odd years in which the data has been collected – 2.3%, versus an average of something like 4%. So on its face, that’s a good thing. We don’t want people failing, because they might be your neighbor. And yet without that, without the dynamism thats success and failure introduced to enterprise, what you’re looking at is like in Europe.”
"My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates.

We put the cart of asset prices before the horse of enterprise.

We entertained the fantasy that high asset prices made for prosperity, rather than the other way around.

We actually worked to foster inflation, which we called 'price stability' (this was on the eve of the hyperinflation of 2017).

We seem to have miscalculated."

Seems that things go round in circles one way or another. Before that we had for example, Reaganism & on a lesser scaleThatcherism. NZ has to navigate it’s economic course through all the turbulence that the big players create by certain, or uncertain, economic measures or practice. When you have for example three states in the USA with individual GDPs larger than say Russia, American influence on world economics is overreaching going on overwhelming. Hard to get out of the slip stream.

Things do go around but the wisdom that underpins our thinking should stay.

Central banks and money creation. Look at asset price graphs especially from the early 70’s once the US moved of the gold standard and by default many other countries. We will go through these cycles until the creation of money is addressed sadly enough.

dp

You know decisions about whether to take on debt aren’t really about the credit rating. Yes, if the credit rating was in danger this might dissuade you from borrowing more. But just because it won’t fall, doesn’t mean we should be borrowing money.

The overriding consideration should be two things - the quality of the least beneficial piece of spending - the piece of spending we are borrowing to support. Note, this isn’t necessarily what the government says it is borrowing for e.g. hospitals, since you might consider its fee student fees the part that would be cut were borrowing not to occur.

Given that most of the time borrowing is supporting transfers - Working for families, superannuation, other benefits, free tertiary education - you are essentially saying it is easier to pay for these in the future versus now.

Clearly this is not true. We are heading for a massive fiscal crises driven by the ageing population both through superannuation cost but even more problematic rampant health costs. We are not going to be more able to pay for the debt+interest than we are now. If we need this expenditure we need to prioritise and/or raise taxes on current earners and beneficiaries of any policy.

The problem with an aging population is not whether the government will have enough paper to print dollars to pay for superannuation or healthcare in the future. The problem is whether we will have enough retirement villages, trained carers and hospitals as well as increased labour productivity so my child can produce enough to support her two aged parents. You can save bits of paper now and forgo consumption and investment. Kill demand and contract the economy. But that isn't going to create the real infrastructure needed to support an aged population and support increased productivity. You'll have lots of paper in the future but nothing to spend it on.

I’m confident robots and automation will solve a lot of the workforce problem. I’m more worried about the taxpayer problem. When you look at the ratio of tax payers to those drawing NZ super in 2050 it’s terrifying.

Currently approximately 17% of our taxes goes to super. I’m 29 years old and saving for my retirement while paying for another generations. As Hardly points out, we have a major problem in the future. Being pragmatic, I know I’m not going to get super. This reinforces the importance of pay your own way and not to rely on Ponzi schemes.

Long before you reach retirement age, the conversation is going to have to be had about a UBI as work becomes more and more precarious as technology takes over. You would be wise not to give up on a pension, you should fight for its continuation. The only way one person can provide for their current and future lives is by denying someone else theirs, there is only so much one can earn by work as we know it, unless you are one of the privileged few whose salary far exceeds what is required to live off.

Actually, without significant capital investment - what business aren't doing much of right now (why when there's no demand?) - we won't get automation and robots. We won't get increased productivity so fewer workers can produce enough for all the oldies. The phrase "they promised us jet packs but gave us Twitter" comes to mind. The "huge investment in automation" thing is a bit of a croc in my opinion. A study I read a few months ago said occupational churn (occupations becoming obsolete) was much lower today than in other historical periods. http://www2.itif.org/2017-false-alarmism-technological-disruption.pdf

Also as people have pointed above fiscal stimulus should be counter cyclical. This is not the time for stimulus.

And why's that? Are the sheeple still loading up on new cars, houses, and o/seas holidays?

Low corruption? Or do we have high corruption at a high level, in that a crafty politician has far more power than his very low popularity endorses?

I'm not at all sure that making Winston kingmaker doesn't count as high level corruption of the political process. Have we thought through the constitutional issues here?

Is this why Labour feel they have to earn their position by appearing fiscally responsible to start with? Because they are only in power on the basis of paying Winston a bigger "bribe" than National.

I dont like Grant Robertson , but I acknowledge his commitment to live within our means as a country is both commendable and laudable .

We cant go throwing money around like drunken sailors on shore leave .......... we will wake up broke, hungover and could contract something you can't spell and the Doctors ( at the IMF) can't cure .

We need only look at Greece , Argentina , Spain , Portugal and Zimbabwe to see the worst effects of fiscal indiscipline .

"Greece , Argentina , Spain , Portugal and Zimbabwe"

Why NZ is different - sovereign currency, floating exchange rate. The others are different - in order:

Euro - once pegged to US dollar - Euro- Euro - destroy agricultural sector and supply side of the economy.....

We are more like Japan, US, UK .

Not quite. NZ is like Australia. A commodity producer that has a sovereign currency and consistently lives beyond its means (runs perpetual current account deficits). We are the poster child of the Anglo monetary hegemony. We are not like Japan in that our industrial capacity is virtually nil; we don't fund our debt entirely within our borders: and we are a debtor as opposed to a creditor (which is why NZD and AUX crash in times of crisis).

Other countries choose to hold NZ dollars and give us exports. They might choose not to one day. That would have positive and negative effects on the currency and our import/export balance. However, the effects would not include NZ government defaulting on its sovereign debt in NZ dollars.

Nice summary there. Why have successive governments set out to destroy industry in New Zealand? Everyone seems to think it is dirty and should be shut down, why is that?

I came across this item..on Quora..

Why does it seem like everything the government does cost so much, millions when it should be thousands, and billions when it should be millions?
Ron Rule
Ron Rule, CEO @ As Seen On TV
Updated Wed

Because government agencies have no profit incentive to manage costs, make decisions based on political appeal instead of actual problem solving, and allocate their budgets based on last year’s spend instead of this year’s need - which encourages waste.

They don’t worry about where the money comes from because their income is guaranteed, and the allocation method encourages over-spending.

Say you run a government department and your budget this year is $1 billion. If you don’t spend that whole $1 billion, next year you won’t get $1 billion - your budget will be reduced, because you demonstrated that you didn’t need that much. This model incents department heads to make sure they spend their entire $1 billion, even if they don’t really need it, because they don’t want to have less to work with next year.

If you just bought new computers, new vehicles, and redecorated your offices a year ago, in any private company that would last you for at least a few years. But in a government agency, their logic is that you’ll want to spend the money to replace them every year, because if your budget is cut you won’t have the money to do it when you actually need new ones.

Now imagine this mindset spanning across all departments, with hundreds of billions of dollars. Schools, the military, social programs, the EPA, all of it. Every single one. Government agencies whine about budget shortfalls so the uneducated masses will demand more funding for their favorite programs - oblivious to the reality that the majority of it is deliberately wasted on overhead.

It’s the dumbest financial model ever, and any private company that tried to operate this way would go out of business. But since the government doesn’t actually have to earn its income, they don’t care.
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Maybe, just maybe they are waking up....Live within....Our..Means.

So how come countries with government run healthcare have lower costs and better outcomes for citizens than the private system in the US?