Monetary Policy, Government Debt And Bonds
Open letter to Hon Grant Robertson, Minister of Finance
20 May 2020
Cc Right Hon Jacinda Ardern
Dear Minister Robertson
First, let me express our Society’s deep appreciation of the overall manner in which your Government is responding to the Covid-19 crisis. We recognise the perfect storm of events you are having to navigate - tourism collapse, drought, volatile commodity prices and epidemic. Under such circumstances we understand the need to run a large fiscal deficit. However, it is the manner in which that deficit is financed that concerns our Society and which is the reason for this letter.
Currently, the Reserve Bank (RBNZ) is buying bonds from the secondary market, so Treasury (or future taxpayers) will be indebted to them and have to honour interest charges for the foreseeable future. At the time of writing, the RBNZ has just doubled its quantitative easing borrowing programme, with a commitment to purchasing up to another $27 billion of bonds over 12 months. This brings the value of the RBNZ’s Large Scale Asset Purchase programme from the previous $33 billion limit, up to $60 billion.
The assumption is that at some point in the future, better times will enable the loan to be cleared. However, global debt is continuing to grow and all the while the quantity and quality of our resources is steadily declining, so this prospect is looking increasingly unlikely.
Thus, we think it would be far preferable for the Reserve Bank to purchase bonds directly from Treasury instead and ask that you advise us of the Governments reasoning for not, to date, doing so.
Key reasons why we think it is a prudent course at this time include the following:
- Since the loan is from one Government agent to another, does not impose any burden on society. Such an internal debt is owed by a nation to its own citizens, so can just lie on the books indefinitely and is thus effectively forgiven. Government debt per se is more of an issue for a neoclassical perspective than modern monetary theorists, where government is seen as playing a small role - a view Covid-19 has dramatically exposed.
- Right now, the risk of inflation is very low as we are approaching a deflationary period, so could be managed with taxes if required. There is spare capacity in the form of plant and labour lying idle and the velocity of money has slowed right down. Key to controlling inflation is of course to keep this money supply in balance with the goods and services available. The time to worry about inflation is when we have fully employed all our labour and resources.
- It doesn't result in an unfair transfer of wealth and disproportionately penalise certain sets of people. Borrowing on the market transfers wealth from younger taxpayers to older individuals and institutions with the largest portion going offshore.
- Buying bonds on the secondary market will not promote banks to lend to business. The interest-free loans that the government is offering appear to be an acknowledgement of this.
- It is cheaper. Treasury can sell bonds at zero interest to the RBNZ whereas the rate at the moment is 0.9% or less. The interest is very low. Even if the Treasury sold bonds to RBNZ at the going rate, legislation requires that the interest payments they received be returned to Government, making the transaction effectively interest-free.
Under current circumstances, it appears to our Society that there is little other than convention preventing Government from borrowing directly from the RBNZ. For example, the Bank of England has purchased 30% of its Government bonds directly from Treasury without linked currency stability issues.
Thus, for the reasons provided above, and particularly to mitigate issues around intergenerational justice, we appeal to you to give the option of borrowing internally your serious consideration.
I wish to acknowledge the following Wise Response supporters in the preparation of this letter – Dr Geoff Bertram, Dr Marjan van den Belt, Dr Robert Howell, Peter Fraser, Deirdre Kent and Cath Wallace. A brief background note to the Wise Response Society is appended.
I look forward to your reply and better understanding your thinking on this matter.
Alan Mark PhD, (Duke), Hon DSc (Otago), FRSNZ, KNZM
Dugald MacTavish, QSM
Annex A: Wise Response Society Inc
- Wise Response is an Otago-based but New Zealand-wide, non-partisan Society, launched in 2013, with the purpose of persuading the New Zealand Parliament, Government and New Zealand society in general, to confront and respond effectively to any confirmed threats arising from the question: "As demand for growth exceeds earth’s physical limits causing unprecedented risks, what knowledge and changes do we need to secure New Zealand’s future wellbeing?"
- The Society has no formal membership beyond the 15 persons who formed the Society. But its strength is in the wide range supporters who participate in online discussions around the "limits" theme, many being experts in their professional fields are able to provide multidisciplinary input into our initiatives. Our Patron is Sir Geoffrey Palmer QC.
- In April 2014, we presented our 5,000-signature petition to Parliament, that recommended they undertake a Risk Assessment of New Zealand, in five subjects as follows:
- Financial security: the risk of a sudden, deepening, or prolonged global financial crisis.
- Energy and climate security: the risk of continuing our heavy dependence on fossil fuels.
- Business continuity: the risk exposure of all New Zealand business, including farming, to a lower carbon economy.
- Ecological/Environmental security: the risks associated with failing to genuinely protect both land-based and marine ecosystems and their natural processes.
- Genuine well-being: the risk of persisting with a subsidised, debt-based economy, preoccupied with maximising consumption and GDP and increasing inequality.
- The Appeal sought a commitment to a quantitative, cross-party risk assessment of how and exactly where New Zealand is exposed, as a rational, integrated basis for planning a more secure future. The petition was referred to the Finance and Expenditure Select Committee, with a hearing on July 1, 2015. The majority response was negative, claiming Government was adequately addressing the issues of concern, but the three minority parties (Labour, NZ First, Greens) offered strong endorsement.
- Since then the Society has continued to promote the idea of squarely confronting biophysical limits though various avenues, including the Royal Society, petitioning parliament through GLOBE NZ, arranging seminars and public meetings and submitting on proposed government policy.
- Further information is available at our website: www.wiseresponse.org.nz