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dear sysop: on covid-19 debt

Written By: - Date published: 3:33 pm, April 25th, 2020 - 60 comments
Categories: covid-19, Economy, internet, Media, Politics, treasury - Tags: , , , , ,

We put in guest posts and reposts here periodically. The reposts are from where we have generic arrangements with other sites, and we can just put them up. Usually they are on areas that none of our authors have covered or where an alternate view is worth (in the view of a person with editor rights) to discuss.

Guest posts are unsolicited and are either sent directly to authors with editor privilege or go tho the email. That latter’s chance of being published here depend on the person with access to the e-mail (currently just me) having time to process them. Sometimes they get overtaken by events. Sometimes they simply don’t pass a very criteria.

I’ve often thought that I should start doing some training on why I’d reject something. So I’ve started with this one that arrived today. Hopefully this will educate this author and other prospective authors how to lift their work up to The Standard.

I’ve left the identifier of the author off. But this is otherwise the full text. And I’ll discuss why this isn’t worth being a guest post under the specific Contribute following guidelines (my italics):

  • A guest post should be something more than a comment. It needs to offer new insight or information that hasn’t appeared in posts on The Standard already.
  • Take some time to form your argument well and make it comprehensible.

Labour’s response to Covid 19 has been exceptional. That the great majority of New Zealanders should take upon themselves such hardships because asked, extraordinary. But also not extraordinary. We were asked to do what we agreed was the reasonable thing to do.

Labour’s response to the financial situation caused by Covid 19 is poor in comparison. This is not a criticism of the measures taken. But rather of the opacity that surrounds the financial situation compared with the transparency indicative of the Covid 19 response.

We do not know for example what it means for the government to borrow billions. Is this debt printed by the reserve bank and able to be forgiven? Is it debt borrowed from Australian banks, borrowed from American banks, printed by their Fed? Certainly moneys put into an economy need to be taken out of it to control inflation. But we are not taught this. Nor therefore a role of tax, or a role of paying down public debt.

How can the people be expected to behave in a financially cogent manner, similar to the manner they have behaved towards lock-down, when we can’t agree with what the government are doing because we don’t understand the reasons for it. And how can we trust the government when we suspect financial obscurity is retained for the purposes of controlling the population sans their reasoned consent?

Ok at the face of it, this is a fair enough argument and clearly written.

I personally don’t know the answers to the points raised myself. And I’m kind of over-educated in that I have two degrees particularly relevant. Nor are a pile of completed and uncompleted graduate and undergraduate papers in diverse topics. But this is a question of public and economic policy that isn’t something that I have more than a vague theoretical knowledge acquired from 35 years ago.

It was covered briefly in the MBA back in 1985. But I mostly remember that part of the courses as being horrified at the morass of debt we’d got sunk into as a nation by the National government under Muldoon. And the focus of a MBA is about business rather than public or economic policy. I’m reminded of this whenever I see any businessman trying to do public policy. They are invariably appalling at the basic job because the skills, timescales and attitudes required are so different.

However I’m pretty much a generalist. So when I take the time from my other tasks to put up guest posts, I will do some basic checks to see if the author took time to understand their topic and have their facts correct. This reduces the amount of time moderators have to expend to staunch with the blood flow as commenters deal with bad arguments by authors.

I started by typing “nz govt borrowing for covid-19 response” into google search without any other parameters. The 3rd link in the resulting list was a Spinoff article from last week: “How do we pay for the Covid-19 stimulus package?“.

This is by the NZIER who are accurate on facts. Rough reading time: 2 – 8 minutes depending on how often you start yawning.

How do we pay for it? 

Obviously, the government doesn’t just have a spare $12 billion sitting around – but like the rest of us, it can borrow when it wants to spend more than it has. It does this by selling government bonds, called Kiwi Bonds. These are basically little packages of debt which promise to pay a fixed amount of interest, and to repay the borrowed amount after an agreed length of time (with Kiwi Bonds, time frames range from six months to four years). These bonds are considered low risk, because people trust that the government will be able to pay them back in the future. They’re a staple for investors, and you’re likely to have invested in them yourself if you’ve got a KiwiSaver. 

Then as they should, they have moved on to the contingencies. After they talked about the downstream effects of the interest rates and the Reserve Bank OCR.

When you’re all out of OCR options and interest rates still threaten to rise, there’s another tool the Reserve Bank can use, and this is the first time we’ve used it here in New Zealand. This time it’s all about stopping the bonds from getting cheaper in the first place, by guaranteeing to buy the bonds wherever they are being held.


Hold up… where does the Reserve Bank get money to buy the bonds?  

That’s the clever bit. Conveniently, the Reserve Bank can produce NZ dollars, so it can actually buy the bonds by effectively creating money. As an extra bonus, buying up government bonds held by retail banks puts more money into circulation, so banks are able to lend more. Using new money to buy government bonds is called quantitative easing (QE), and it was a popular tool for the countries worst affected by the 2008 financial crisis.  

And they then go on to how this accumulated debt gets projected into the future, why we don’t want to use QE all of the time, and why it needs to be reserved as a capability for real emergencies like great depressions, world wars, and pandemics rather than (as I’d put it) every time we can’t get a societal consensus on how we fix a social issue.

Good article. Clear, factual, and a bit of reminder about why I need to give The Spinoff a donation; next month. I just subscribed to BusinessDesk to get some local business news as the generally decent business news is locked down behind the other trash like Mike the Moron at the NZ Herald.

But a single source talking about a topic isn’t enough.

So I did a cursory scan on the next link from april fools day at Stuff: “Coronavirus: Government doubles borrowing forecast as economy worsens” which said much the same things in the simpler journalist cant. Reading time 1-4 minutes depending on how distracted you get by the damn ads. My italics indicate the only new bit of information that I was really interested in.

The Treasury’s Debt Management Office will now be releasing a plan of how much it plans to borrow an when each month. 

It plans to borrow $800 million each week in April.

Despite its plans to borrow more, borrowing costs remain low.

This is in part thanks to the Reserve Bank which has announced that it will purchase Government debt, although it has said it will not be purchasing debt directly from the Government. 

The Bank has said it will buy up to $30 billion over the next 12 months.

Ok, so in two links from a general query on google search, I’d found out who was responsible for the managing debt at the government.

A quick search for “treasury debt management office” yields their home page. I did a little read around to look at the different kinds of financial instruments, a couple of upcoming tender announcements, and the results.

Now if I look back at the potential guest post…

… But rather of the opacity that surrounds the financial situation compared with the transparency indicative of the Covid 19 response. We do not know for example what it means for the government to borrow billions.

That is clearly a false fact. The information is easily available on the net if someone looked for it.

That NZIER article at Spinoff was damn near perfect and fully visible in the public sphere. The general news article at Stuff provided the information about the direct organisation was responsible for managing the debt. That had fully transparent information about the mechanics.

There was no opacity in the public domain about either what the level of debt was, how it was being financed, how it was being managed, and ultimately how it was going to be paid back. I found all of this out in less than 10 minutes sitting at my desk. It took me far far longer to write this post.

I was forced to conclude that the author of this potential post was just someone who didn’t look for the information or possibly had a reason that they didn’t want to look for it. If it was the latter, then I’m not going to speculate on the reasons for that. I’d suggest commenters don’t inside my post either.

I really did find the inherent assumption in the post rather offensive when it said in the final lines..

And how can we trust the government when we suspect financial obscurity is retained for the purposes of controlling the population sans their reasoned consent?

I’d suggest that author can take me and most commenters on this site out of the ‘we’ in his final words. The author wrote their own opinion. The presumption of trying to make out that I was also being a lazy willfully ignorant conspiracy addled fool like the author quite offensive. A point to note when you’re writing a post is to always make it blindingly clear what is your own opinion and to not presume to speak for others unless you are in fact a spokesperson for a group.

Similarly where the author says “But we are not taught this” then that is also just weird. It implies that we should be educated on things that are possible to look up. Sure there probably should be more emphasis on what could be described as ‘civics’ in schools. But I hardly think that is likely to drop down to the layer of talking about the process of debt formation by government.

In the days of yore we had the libraries which we got taught about. And these days the internet which, while it allows false fact trash to propagate, also allows valid information to be dug out with minimal effort. You mostly need to know how to search and read.

Education is mostly about being taught to allow people on how to dig out information to make their own assessments and opinions. Mindlessly expecting someone else to do the work for them is just the epitome of of a gullible fool just waiting to be skimmed by a con artist – like Trump.

Expecting to be spoon fed current information is something that, in my opinion, can sometimes accept from children. But personally I’m usually more interested in getting even them to hop on their devices and looking it up than telling them how to think.

There are always gaps in everyone’s knowledge. I tend to feel them rather acutely myself every time I sit down to write code or blog posts. But the basic information about our government these days is largely published in public. Where it isn’t, there are tools like the Official Information Act available to dig them out.

I’d tend to agree that often some the open media are pretty dire at explaining even mildly complicated things very well. But when you want to write something for The Standard then it pays to use one of the open forums like our OpenMike to test your idea first. Otherwise the hordes of commenter tend to be pretty cruel to authors at exposing just how much they don’t understand. But this post would have been an excellent comment. The author would have been ‘educated’ while also raising an interesting topic for discussion.

And almost anyone else would be kinder than my nature allows me to be when forced to use up my valuable time. I know that I’m a harsh teacher. But I prefer working that way when educating because it reduces my time in that role. Most people, while learning fast, will also find my process of training people to think rather than leaning on me to be rather exhausting and probably somewhat demeaning. I really don’t care that much if that is their impression.

I was trained by the army and by private business in how to teach rapidly and clearly. That has been heavily honed by moderating trolls on this site and its predecessors on the net. I like facts to be accurate and at least supportable with a quick search on the net, opinions to be clearly stated as opinions, and that anyone putting up a proposition to be in a position to defend it (even if they modify it in the face of robust debate).

I don’t require that I like the argument or the opinion. But if I take the responsibility to put a guest post, then I require that I can defend the decision to do so. This post didn’t rise anywhere close to those requirements apart from having a topic worth looking at.

Now moving on.. While I have rather eviscerated this author, is there any substantive commentary on the technique of pre-processing guest posts?

And while, in my opinion, this guest post wasn’t worth putting up, the topic raised was. Has anyone else got some other points links or links about the debt, its sources, process, and eventual repayment?

There are other specific sources of information that are behind paywalls. Like a paywalled article “Finance Minister quashes idea of RBNZ buying bonds directly from government” that refers to Robertson’s answer at a presser yesterday. If I dug around inside paywalls, then I’d expect to find more information. However for the purposes of this post, we’ll follow the usual practice of requiring linked sources and authorities to be open public sources.

Updated post with the comment about NZIER removed. I was confused them with NZ Initiative.

60 comments on “dear sysop: on covid-19 debt ”

  1. tsmithfield 1

    I think that quantitative easing is the obvious answer here.

    In normal times, this sort of move would be highly inflationary. But in our current situation it is merely generating income the economy is not generating through standard means.

    Therefore the government should just get on with it and flood the economy with as much liquidity as is needed to do the trick.
    Plus, as mentioned above, the RB can forgive the created debt. So, it may never have to be repaid.

    Despite the government embarking on this course of action, the NZ dollar has hardly shifted. The reason is that most other countries are doing the same. Therefore, in relative terms it isn't overly affecting the value of our dollar.

    • David Mac 1.1

      Ha, that's interesting, everyones' currency is tanking so everyones' currency is worth about the same. I guess the foreign exchange jockeys are trying to pick which one might breakaway and tank faster and which are the most buoyant.

      Lprent, I think it has the potential to be a great post and it hasn't matured. The good posts seem to pose a question or state a case that triggers stimulating debate. If it's a question that can be answered factually with a few Googles, I agree the author needs to do that. I think the writer has an underdeveloped idea for a good conversation starter.

      • David Mac 1.1.1

        There is the '2 Googles and 5 minutes reading blew your concerns out of the water.' approach and the approach you don't have the time or inclination to deal with Lyn. You know the Cuomo approach is right…"Thank-you for your submission, we're very grateful for those that take the time to prepare a guest post. A quick Google revealed the answer to your primary case but I think the A, B and C points you raise are very interesting. Do you think you would be able to re-focus on these aspects and re-submit?"

        Lyn, give this job to a few of the trusted regulars here that regularly pose interesting questions. The Guest post review team. It will enhance the site.

      • pat 1.1.2

        a conversation starter…what happens when the intrinsic value of the worlds reserve currency is destroyed?

        • Blazer

          How can the value of the U.S dollar be destroyed?

          There would need to be an alternative that had widespread credibility and acceptance.

          Since Bretton Woods post WW2, the U.S dollar has been the default international currency,along with U.S domination of the IMF and B.I.S,and the swift payments system it would be extremely unlikely.

          The amount of $U.S denominated debt held by other countries has to rely on a level of stability otherwise it would undermine repayment.

          Private debt is the big problem not public debt.

          The domino effect of chronic unemployment will lead to bank insolvency and the now expected Govt bailout.

          • pat

            "How can the value of the U.S dollar be destroyed?"

            By constantly creating more of them without a commensurate increase in backing assets.

            "There would need to be an alternative that had widespread credibility and acceptance."

            Or several alternatives perhaps…when trust in a currency is lost alternatives are found.

            " Since Bretton Woods post WW2, the U.S dollar has been the default international currency,along with U.S domination of the IMF and B.I.S,and the swift payments system it would be extremely unlikely"

            A whole 70 years ago…what was the reserve currency pre Bretton Woods?

            "The amount of $U.S denominated debt held by other countries has to rely on a level of stability otherwise it would undermine repayment."

            You may note the general acceptance that the debt will not (cannot) be repaid.

            "Private debt is the big problem not public debt."

            DEBT is the problem…both public and private.

            "The domino effect of chronic unemployment will lead to bank insolvency and the now expected Govt bailout."

            Governments (those with sovereign currency) are only able to create their own currency (or use foreign reserves) not USD …the numbers dont add up.

            Every time the Fed creates more USD they devalue the rest of the worlds assets…why would the world continue to accept that?

            • Nic the NZer

              "By constantly creating more of them without a commensurate increase in backing assets."

              What prey tell is backing the $US?

              • pat

                US owned assets…and the expectation they will remain required/available.

                • Nic the NZer

                  Oh, so its their economy backing their money supply, can we measure this by US GDP.

                  I'm just wondering because the US has been implementing these kinds of monetary policies for about 10 years now (Japan has for 20 without being a reserve currency, whatever that means). So just when can we expect your economic theory to kick in?

                  Actually it sounds like something one Peter Schiff (a well known US gold bug) was saying months after the US started doing QE (so more than 10 years ago), so is it the same and would buying gold shortly before this kicks in be profitable?

                  • pat

                    "I'm just wondering because the US has been implementing these kinds of monetary policies for about 10 years now (Japan has for 20 without being a reserve currency, whatever that means). So just when can we expect your economic theory to kick in?"

                    and Im wondering how many financial crises it takes to realise the root of the problem.

                    • pat


                      "In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF.[2][3]

                      This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency.

                      Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor which would have been a special international reserve currency to be used instead of the dollar.

                      American economists such as Brad DeLong agreed that on almost every point where Keynes was overruled by the Americans during the Bretton Woods negotiations, he was later proved correct by events.[4]

                      Zhou's proposal attracted much international attention;[5] in a November 2009 article published in Foreign Affairs magazine, economist C. Fred Bergsten argued that Zhou's suggestion or a similar change to the International Monetary System would be in the best interests in both the United States and the rest of the world.[6] While Zhou's proposal has not yet been adopted, leaders meeting in April at the 2009 G-20 London summit agreed to allow 250 billion SDRs to be created by the IMF, to be distributed to all IMF members according to each country's voting rights.

                      On April 13, 2010, the Strategy, Policy and Review Department of the IMF published a comprehensive report examining these aforementioned problems as well as other world reserve currency considerations, recommending that the world adopt a global reserve currency (bancor) and that a global central bank be established to administer such a currency.[7] In this report, the current issues with having a national global reserve currency are addressed. The merits, difficulties and effectiveness of establishing a multi-currency reserve system are weighed against that of the SDRs, or "basket currency" strategy, and those of establishing this new "global reserve currency". A new multilateral framework and "multi-polar system" for managing capital flows and national debts is also called for, but the IMF cautions that it prefers a gradual shift to this new framework, rather than a sudden change."

                    • Blazer

                      Nixon taking the U.S off the Gold Standard in 1971 was the catalyst for the explosion in debt and inflation.

                      The costs of constant war and the arms/space race meant the U.S could not honour the $US35 -10Z GOLD exchange rate.

                      The U.S dollar is backed by their domination of financial institutions mentioned and the confidence in its military might.

                      The Greenspan years ,when banks became gambling institutions with an array of 'products' to promote and their ramifications has lead to the situation today where the Fed is relied on ,basically to implement QE infinity to maintain economies.

                      Forex gambling,share buybacks,derivatives,private equity funding have all superceded productive sectors of the U.S economy.

                      The Fed undertake currency swaps with other countries to keep some balance in exchange rates.

                      If there was a finite amount of acceptable 'currency' in the world and no compounding interest charges ,there would be no inflation and the price of all goods and services would adjust in line with the aggregate of the total 'currency'.

                      Various alternatives have/are being considered ..the 'Bancor' was promoted by Keynes(I think)as an international trading unit and these days there is talk of 'special drawing rights' allocated as a universal device for trade.

                      Nations know the present system gives the U.S a huge advantage in conducting international business.

                      They know it too and believe in…'never give up on a..good thing'.

                      NZ is too small a player but can explore different forms of payment with agreeable counter parties as long as it does not upset the U.S.

                    • Nic the NZer

                      I am going to suggest that the Triffin Dilemma appears to be a phenomena relating to the Bretton Woods era of relatively fixed exchange rates. There was especially towards the end certainly a pressure on the US to supply sufficient reserves to facilitate the rest of the worlds liquidity requirements for payments. But that era ended in 1971 so too has this pressure subsided.

                      One can see that the long term US economic policy of exporting production to China and China's fixed exchange rate with the US could exhibit similar pressures.

                      On the other hand its pretty clear that the US financial crisis was caused by widespread de-regulation of the US financial system and the on-going fraud epidemic which has been a long standing part of the US financial system (this is the one which started out as the Savings and Loan crisis https://en.wikipedia.org/wiki/Savings_and_loan_crisis).

                      In terms of the balance of trade it simply doesn't seem to have a significant impact on US$ exchange rates, so we are still waiting for your theory on the negative consequences to kick in and have some traction in the real world.

                      Note I agree that a more strict implementation of Keynes Bancor plan would likely have resulting in a more stable Bretton Woods system. I just don't think that the US monetary policy has shown any evidence of resulting in significant real world foreign exchange devaluation (which you seem to be anticipating).

                    • pat


                      "The U.S dollar is backed by their domination of financial institutions mentioned and the confidence in its military might"

                      Ultimately any currency (or system) is maintained by its ability to be enforced…when that happens we have wars, something Keynes sought to avoid.

                      "Nations know the present system gives the U.S a huge advantage in conducting international business.

                      They know it too and believe in…'never give up on a..good thing'.

                      NZ is too small a player but can explore different forms of payment with agreeable counter parties as long as it does not upset the U.S."

                      Yes we can explore trade directly currency to currency…as the EU has attempted ….that wasnt well tolerated you may note.

                      What the world is doing is playing a game of monopoly where one player has the ability to print endless monopoly dollars (and rewrite the rules as they please)…the board will be tipped over and the players will walk away as the inevitable outcome becomes increasingly apparent.

                    • pat


                      And Im going to suggest the Triffen dilemma applies irrespective of fixed currency, it is a function of hegemony..something Keynes recognised and sought to avoid with Bancor.

                      Yes the financial crises have been accelerated and accentuated by financial instruments and deregulation but at the base of the worlds economic and political situation today is trade imbalances…it is destroying the EU, is the source of Trumps power, and holds countries like NZ in bondage to a system that dosnt serve it.

                      Your poster child Japan is fortunate to have accumulated a vast sum of USD reserves through through decades of a positive balance of trade and investment in highly productive industries that they can now use to offset the deflationary impact of a declining population…that trade position is beginning to falter and their reserves will come under increasing pressure as will their currency and productivity.

                      Of course the whole shooting match could collapse before that happens.

                    • Blazer

                      'Yes the financial crises have been accelerated and accentuated by financial instruments and deregulation but at the base of the worlds economic and political situation today is trade imbalances'

                      Disagree that trade imbalances are the base cause.

                      Imo deregulation and the creation of financial 'products' by Wall St and the City is the root cause.There is always a counter party to every transaction.


                    • pat

                      @ Blazer

                      Have already conceded derivatives accentuate the problem both by the multiplying factor and the uncertainty they create….key word 'accentuate'

                    • Blazer

                      @Pat what do you base trade imbalances being the major factor…on?

                      Any examples.

                    • pat

                      Its as Stephen says a matter of mathematics…if you have a consistent negative trade imbalance you cannot help but default…the examples are many. Keynes was involved in resolving the debt defaults of a hundred years ago and saw the damage caused and sought to ensure it was unlikely (not impossible) to occur again…he was out bid.



                    • Blazer

                      So the U.S has been running trade imbalances/deficits for at least a decade.

                      Does not appear to be in any danger of…default.

                    • pat

                      considerably longer than 10 years…and appearances can be deceptive.

                      As noted earlier they can print USD to cover that debt…but not without consequence.

            • Stephen Jones

              It is a mathematical issue. Sovereign countries have their own currencies. You could not run a system where each country decided the value of each other's currencies face to face because arbitrage would open up. Somebody would simply buy all the money of one country selling low and sell it to another country buying high. You need some standard ruler with which to measure all country's currencies. How much is the $NZ worth against the $AU if there is no $US into which both can be converted? The $US performs this function as a matter of history, and as a matter of transparency and trust. It really doesn't matter how much money America prints people are going to want it so they can buy stuff from other countries.

  2. pat 2

    It is important to note where the money to purchase the bonds originates…it isnt necessarily from one pocket to the other.

    • Blazer 2.1

      the magic show…

      By Pam Martens and Russ Martens: April 24, 2020 ~

      The Fed is back to its same ole bait and switch routine.

      Yesterday, the Federal Reserve issued a press release, which, on the surface, made it sound like the Fed is going to make full disclosure on where its trillions of dollars in money created out of thin air is going. Unfortunately, upon closer inspection, the Fed is saying it will only release the names and details of its programs where the taxpayer is putting up money to absorb losses.

      That leaves the following programs with no guarantee of timely transparency: the Fed’s repo loan program which has already made more than $9 trillion in super cheap revolving loans to the trading houses on Wall Street; the Fed’s Discount Window which, as of this past Wednesday, has a balance of $33.7 billion that went to unknown banks; the $31.5 billion currently outstanding at the Fed’s Primary Dealer Credit Facility, which is making revolving loans at ¼ of one percent to the trading houses on Wall Street against collateral that includes stocks and toxic waste known as CDOs and CLOs.

      Then there is the $409.7 billion that, as of Wednesday of this week, is currently outstanding to unnamed foreign central banks in dollar swap lines from the Fed.

      The opening sentence of the Fed’s press release yesterday touted the Fed’s “strong record of transparency and accountability….” That sentence could have come straight out of The Onion, the satirical news site. This is the Federal Reserve that during the last financial crisis battled media outlets in court for almost three years to keep its staggering $29 trillion in revolving loans to Wall Street and its minions a secret from the American people and Congress.

  3. Nic the NZer 3

    Some extended notes,

    "Conveniently, the Reserve Bank can produce NZ dollars, so it can actually buy the bonds by effectively creating money." – NZIER

    Not only does the Reserve Bank produce NZ dollars, its the only institution which creates the monies which the government uses. The commercial banks also create monies in the form of bank deposits but when large financial institutions pay each other or the government, it is inside the payment systems operated by the Reserve Bank (or rarely in cash also issued by the Reserve Bank).


    Because the RBNZ is a part of the government this means that the government always has the means to pay for everything available for sale in $NZ. What usually occurs is for the spending to be included in the governments present budget and then that spending occurs. Spending includes repaying government bonds with interest as well as public spending programs. This is the primary reason that bonds held with a government which issues its own dept are said to pay the 'risk free' rate of return (e.g there should be no default risk).

    At this point it gets rather more complicated and as in a pay walled link its still considered important for the RBNZ not to lend directly to the government to facilitate payment, but only to link in the secondary markets. Instead the RBNZ (and many other central banks) are lending money to the government by buying up government bonds in the secondary bond markets. Supposedly this allows the bond purchases in the primary bond markets to be correctly price the risk of the government debts defaulting. In theory this imposes financial discipline on the government, but this is certainly debatable. As some financial insiders have figured out however the default risk on such bonds is effectively nill and so a valuable carry trade is regularly manufactured where primary bonds are priced a little below the secondary market price and primary bonds dealers get an automatic profit.

    https://en.wikipedia.org/wiki/Warren_Mosler (see pre-Euro Italian bond example)

    The actual workings of government payments would obviously be more easy to discern for the public if either the government ran an automatic overdraft with the RBNZ or the RBNZ just loaned directly to the government as needed. In practice the functionality of the system is the same in both cases however (other than minor differences in which institutions clip the ticket).

    "Certainly moneys put into an economy need to be taken out of it to control inflation. But we are not taught this. Nor therefore a role of tax, or a role of paying down public debt." – Anonymous

    I agree with the sentiment that there is actually a lot of confusion with how government finances work and a further problem is that certain outcomes are fundamentally conjecture and based on tenuous theories of how the economy works. I would not support such claims as that money needs to be taken out of the economy to control inflation, be taught in civics or necessarily even in economics unless the basis for this claim is also taught. In the case of controlling inflation probably Anonymous model of inflation akin to the public facing mainstream theory of inflation (also the 'long run' theory), which is that commercial banks some how multiply the supply of money up into a broad money supply, the reserve supply being constrained by the governments spending and monetary policy, and that this then maps to a fixed supply of goods and services produced by the economy and purchased with the ratio reflecting inflation. This then implies the policy response of removing the reserves from the economy working to reduce inflation (at least in the long run).

    Unfortunately this is not a model of the economy which is supported by the economic institutions, because

    1) Many countries including New Zealand do not have a fixed reserve ratio, meaning there is no limit on lending based on commercial banks access to reserves.

    2) As with many countries the reserve bank OCR policy means it will lend as many reserves as needed for banks to settle at its present policy rate (so reserves are always available).

    3) There is no evidence of a correlation between either reserve or bank deposit monies and the evident inflation rate anyway.

    4) There is little evidence that people pay attention to the amount of money, or even the monetary policy rate when making pricing decisions which implement the inflation rate.

    Instead two claims appear to reflect the institutions of the economy more accurately,

    1) The amount of bank lending is constrained by the prospective bank borrowers ability to repay and interest in taking on loans.

    2) The inflation rate is probably reflective of peoples perception of what inflation was recently (workers who can influence their raises often consider in the inflation rate to their expectations) and on an individual pricing level basis may reflect when there is strong demand for business services (when there are lots of customers you might consider raising prices).

    Regarding the role of paying down government debt, it should be observed that a government like NZ doesn't face any financial constraints and doesn't need to ever need to pay down its debt on that basis. Many governments are still rolling over debts accumulated during the second world war in fact. Its of more considerable importance to keep the economy going, rather than face economic dysfunction. On a macro level the actual economic constraints facing the government are the real resource constraints of the country (which reflects 2, above). An effective economic policy would focus on maximizing the employment of the population by employing anybody who can't find a job in the private sector and adjusting tax rates (among other policies) to reduce private sector access to certain resources where the government wants to use these resources for public policy instead (or due to ecological damage stemming from that resource use).

    • Nic the NZer 3.1

      Just found this post which goes into detail on the applicability of the 'quantity theory of money' or the belief that 'adding money to or taking money out' of the economy drives inflation.


      This theory is also sometimes stated as the belief that money is neutral (or neutral in the long run), or the claim that "Inflation is always and everywhere a monetary phenomenon" – Milton Friedman.

      • RedLogix 3.1.1


        Very comprehensive and an well structured read. Thanks. I was only ever a very amateur economist, but interested enough to get a lot from that.

        This theory is also sometimes stated as the belief that money is neutral

        Keen on the other hand insists money is not neutral, and that the creation of credit is the primary driver of credit. One of his earlier papers on endogenous money is quite mathematical, but makes it's conclusions readably enough.

        Another unconventional tool that might be applicable here is the idea of a Gesellian currency, money that essentially lost it's value unless it was spent within a short period, like a month. It could be issued in parallel with the usual currency as a UBI. The idea was tried in Depression era Austria with some success, and it seems to me similar conditions now prevail.

        Edit: Another link to the Gesellian idea:

        • Nic the NZer

          The Keen link is certainly worth seeing especially if you are only familiar with equilibrium analysis. The idea of non-neturality of money has a much longer pedagogy. Paul Davidson the economist has been a long standing exponent of non-ergodic economic theory and Keynes almost certainly was somewhat familiar with precursors to ergodic theory concepts including the non-neutrality of money.

          "The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

          J. M. Keynes A monetary theory of production (1933)"

          I believe Keen would be familiar with this from such sources as he has taught the history of economic thought.

          I think Gesellian money might have some impact to reduce saving rates and increase consumption spending, but we have sufficient tools to resolve the economic problems by just applying fiscal policy to the extent required anyway. I am not sure that we need more tools for the policy wonks to play with or certain that it will result in a better outcome.

          • RedLogix

            Thanks. I missed this reply yesterday.

            I was taught to see that money has two fundamental characterisitics. The obvious one is the 'means of exchange' aspect which applies when we use it to buy goods and services in exchange for our labour. If this were the only aspect, then indeed money would be totally neutral.

            The other is the 'store of value' aspect that is introduced whenever we save or invest into the future. This introduces the time as a dimension, and this changes everything about money, and in particular the act of creating or saving money has a dynamic time impact on the economy.

            Keen argues the creating credit stimulates GDP and paying debt back (or saving) deflates GDP in a manner that is decidedly not neutral.

            A Gesellian currency eliminates the 'store of value' aspect of money, which immediately decouples credit creation from the inflation/deflation cycle. It can immediately stimulate the velocity of money in the short term, without creating instability in the future; ie it is a currency that is truly neutral.

            Just a thought; it's been a while since I've put much energy into this area and I'm appreciating your input here.

            • Nic the NZer

              Regarding Keen's empirical observation that credit creation seems to stimulate GDP more than deposit money. I am not sure that this is a property of credit creation, it may be that the advance of credit very closely correlates with the borrower wanting to spend. This would mean that in an accounting sense credit doesn't perform any differently to deposit money, but that you can maybe track GDP better by looking at how financing is happening.

              Its also important to understand that GDP is a measure of spending=income and not a measure of finance directly. The act of saving removes money from the spending=income flow and as a result this drops by the amount saved (or used to repay debt). An expiring currency doesn't eliminate that though it may bring the deadline closer for an individuals saving towards any expenditure. Depending how good people are at managing their inventory of money another possibility is that a lot of spending just gets lost 'down the back of the couch'.

              As an example of another thing which should apparently only result in a consumption/usage pricing, but if you think of oil futures they are basically a deadline (when you get your oil delivered) and a price for the delivery at that deadline. This is the reason the oil price went negative recently when all the receivers figured out there was so little demand that they would pay people to take the delivery off their hands in the immediate term.

              I would be concerned about this kind of instability resulting should Gesellian currency be the only kind of currency. But its possible it would help a bit if the government had something they could immediately use as stimulus as a temporary measure.

              The underlying problem is a balance sheet recession basically indicates a deficit in spending sufficient to abate peoples present demand to save (the mechanism is many acts of saving/repaying debt) which causes consumption and investment spending to fall inside the non-government sector GDP components (this is observable in GDP statistics). There is not necessarily an obvious suggestion as to when this demand to save will be abated. This can always be offset with an increase in government expenditure at this point until the saving desire is sated (or employment has reached a peak again, because people are no longer looking for more work to facilitate their individual consumption + saving desires). The government can but already is not dealing with this as effectively as it could without the complexity of forecasting when the Gesellian stimulus should be scheduled to end.

    • Nic the NZer 3.2

      Bill Mitchell (in association with the Bank of England) explains the same facts surrounding government spending in slightly words again.


      "He presented this graph which shows that since the GFC, the Bank of England has been swapping bank reserves (light below) for its holdings of government bonds, which it has been buying in the secondary bond market.

      This balance sheet pattern is repeated across many central banks now as they have been effectively ‘funding’ government deficits through their various public bond purchasing policies. They have been saying one thing (that they are not doing that) while doing exactly that."

  4. Stephen Jones 4

    It is odd that you begin by conceding that even you did not have the information required to deny that the situation is opaque. And while I thank you for your diligent research the question remains unanswered, is the government going to forgive this debt or parcel it out to private investors? If the reserve bank can create money by fiat then they can forgive it by fiat. So long as it does not get sold on to private investors. And so long as other countries will be doing likewise and thus not deeming our behavior immoral. As you also pointed out, a question was asked of Grant Robertson regarding whether bonds were sold on primary or secondary markets, a question that is precisely to this point, and yet one he fudged any answer to. Should we not expect our finance minister to be having just this conversation with his peers in other countries to see if the world might be put back on its feet without laboring under debts that are but figments of economic imagination? And if we cannot expect this then I am glad that you have writ the post you did, and the conversation might be had that might inform the public that it would be in their best interests to make this a thing that our ministers might do.

    • Blazer 4.1

      'As you also pointed out, a question was asked of Grant Robertson regarding whether bonds were sold on primary or secondary markets'

      Interesting as to why he is so shy to answer this question.

      A bit like Key/English not revealing exactly who they borrowed all those billions off,post GFC.

      • Nic the NZer 4.1.1

        This is just such a beltway question.

        Grant Robertson answered that way for the sake of expediency and not starting an unnecessary debate about economic theories.

        The insiders are happy because the RBNZ is not funding the government directly (in primary markets) so the government is not fixing the interest rate on its own debt. To insiders this signals that the government is only using fiscal policy in an emergency and will not flip over to "every time we can’t get a societal consensus on how we fix a social issue." – LPrent. Meanwhile the primary bond dealers just clip the ticket and buy the primary bonds and immediately resell them in the secondary markets in whatever volumes the RBNZ is buying. The upshot being that the government eventually pays itself back the interest and principal anyway.

        The unfortunate consequence of this however is that the relevant question of why doesn't the government always stand ready to use its fiscal capacity for all kinds of public purposes is avoided directly. Instead the discretion about what constitutes enough of an emergency to justify the use of fiscal policy capacity is placed in the hands of the treasury economists and specialists. And the public debate to the extent it exists discusses these issues based on a framework rife with strange beliefs about how government finances work and conspiracy theories about who the country owes debt to.

        • Blazer

          Good answer.

          Good reasons for 'conspiracy theories' when the machinations are designed to be complex to the degree that even most bankers and politicians do not understand them,let alone the general public.

      • pat 4.1.2

        Perhaps because it been well answered in the original announcement..

        "There was agreement amongst members to proceed in this manner and by Sunday morning there was a consensus MPC agreement to:

        • Provide further monetary policy stimulus through a Large Scale Asset Purchase (LSAP) programme of New Zealand government bonds in the secondary market.
        • The initial scale of the LSAP programme is up to $30 billion of government bonds, across a range of maturities, to be purchased over the next 12 months.
        • Communicate the decision on the morning of 23 March.


        • Blazer

          Regardless,I still think Nics response to Stephen Jones was a …good answer.

          • Nic the NZer

            Actually its possible to be more direct.

            Stephen Jones asks "is the government going to forgive this debt or parcel it out to private investors?"

            As the announcement above describes in about 12 months time the RBNZ will own about $30 billion dollars of the government debt. What you can see in the MPC announcement is that the two groups of government officials have decided that this intervention is warranted now. Given that the RBNZ is part of the government balance sheet this constitutes the government owing itself that $30 billion dollars of debt more than it does at present. At this point its clearly irrelevant if the government pays the bonds out, or the RBNZ writes them off, as the RBNZ operating profits are returned to the government anyway.

            At present the payments are made back to mostly large domestic financial institutions (and the underlying basis for the government selling debt is another story but its about the implementation of monetary policy, not a shortage of spending capacity) who purchased these bonds and in part will feed into making interest payments to peoples savings accounts (and the like). There will very likely also be a large quantity of government debt not owed to the RBNZ following this policy running to its present completion date.

            The most important take away should be however that the debt in no way threatens the ability of the government to make payments. The ability to make payments itself stems from the function of the RBNZ being to run NZ's payments systems and have monopoly issuer rights over NZ$ in which the New Zealand government transacts.


            See Timeline of the nationalisation of New Zealand’s currency.

            While this doesn't mention electronic reserves, as linked to previously the RBNZ operates all of New Zealand's clearance systems. This is mentioned under 'The Coming of Age of our Tāne Mahuta' section.

    • lprent 4.2

      It is odd that you begin by conceding that even you did not have the information required to deny that the situation is opaque.

      Nope. What I was saying was that

      1. The question was badly framed because it didn't appear to have done any basic research first. The mechanism raising the debt wasn't opaque. It took me less than 10 minutes to determine that.
      2. I didn't move on to the second implied question on the repayment because that also was badly framed. I just didn't bother treating that as in as much depth as the first because writers should be encouraged with constructive criticism rather than repeatably dissected (I live with one).

      On the former I literally hadn't looked at the mechanism of raising debt because there wasn't a functional need for me to be concerned about it. I knew that it wouldn't have been raised by bankers because we haven't needed to do that for a very long time. It has been bonds since the late 1980s. And like 2008 and the GFC we were in a good position economically to weather the storm because our government fiscal position was excellent. Even the National Government had problems trying to muck it up.

      On the latter case it comes down to that the question implied some control over future parliaments and governments. That is unknowable.

      I'm a functionalist in my nature. To me, it simply doesn't matter which way we run this pandemic in NZ. All ways lead to a economy that gets a partial economic munting in the short and medium term and which will hopefully force long term changes like dropping tourism and immigration as a desired economic targets. All ways lead to increased debt as we transition to something else.

      And while I thank you for your diligent research the question remains unanswered, is the government going to forgive this debt or parcel it out to private investors?

      It is unlikely that we're going to forgive the debt in the short term – ie over the next few years. Mostly because there is no real reason to do so at present. Robertson has implicitly said that he doesn't intend to. He didn’t answer the goat fucker questions and just said that the usual process was what was being followed. But of course that can and should change with changing circumstances – like a different government or another disaster.

      As you also pointed out, a question was asked of Grant Robertson regarding whether bonds were sold on primary or secondary markets, a question that is precisely to this point, and yet one he fudged any answer to.

      However the 'fudge(d)' (as you characterise it) was what any responsible minister would do. To me it appears that what you are asking for is that Robertson predicts the future. If he could do that then I don't think he'd be our minister of finance – there would be a lofter goals for him to pursue. If the same question was put to Goldsmith it'd be an interesting test of his fitness to be minister of finance – because responsibly he'd have to 'fudge' it too.

      Should we not expect our finance minister to be having just this conversation with his peers in other countries to see if the world might be put back on its feet without laboring under debts that are but figments of economic imagination?

      He doesn't need to and he shouldn't waste time on it at present. There is more than enough work to do inside the country. And no-one world wide is ready for that debate yet, if indeed it is ever required or if we feel the need to participate. Because of the nature of the economies down here, I'd rather expect that the level we'd handle it would be between us and aussie, possible extending to nations through south east asia. The reason why is that we have far more in common with that region in terms of how our economy is structured than we do with the northern states. Far lower government debt for instance.

      The position of NZ government is that we started with a debt level that was in the order of 20% of GDP. About 4/5th of our export economy is intact and almost entirely functioning. It is suffering a bit due to a lack of air-freight (again damnit!). A major import cost, overseas holidays, got reduced.

      Regardless of if the elimination strategy fails (which seems unlikely) and we have to fall back to suppression, our domestic economy is intact and will progressively restart – probably rapidly. We'll just have closed borders and bugger all tourism in or out (except possibly aussie).

      Over time under our economic constraints at level 1 or above, the picture may change. We might find that there are some unexpected side-effects of the disease. If we had something like a separate disaster kicking in – say a earthquake in Wellington it will change. We could find that there is a deeper depression kicking in as some states close their borders to trade as happened in the late 1920s and early 1930s.

      Effectively what you are asking for doesn't make sense unless you frame it to something that Robertson actually has control over now.

      As far as I can see you're asking an open-ended pie-in-the-sky unanswerable question – one that is in fact the decision of future history and voters. Not any particular current government or minister.

      And then of course Robertson at best could only say anything binding for 5 months max at present. There is a September election. In every legal and constitutional sense, this government cannot bind future governments. Nor their future responses to extreme events.

      FFS: It is possible, albeit unlikely, that we could have a NZ First led government with Shane Jones as Minister of Finance (choice deliberately chosen) for a few years. I'd imagine the policy choices that he'd make would probably be vastly different to those that a Labour led government would do.

      I don't think that in the slightly less unlikely National led government would be that much different to a Labour led one in how they handle the debt based on what we know at present. But they can't bind themselves or future governments either..

      So what exactly is your question? Currently it appears to be empty rhetoric because it isn't framed in such a way that it makes any sense. Unless you think that Robertson is some kind of minor deity with an ability to shape future events.

    • Brigid 4.3

      " thus not deeming our behavior immoral." But why managing our economy as we see fit be seen as immoral?

      And considering banks are doing just this thing (creating credit) every night and day of the week..

  5. Bill - not the regular bill 5

    Re: NZIER merger?

    You might be mixing up the NZ Initiative and the NZ Institute of Economic Research. The former had a merger a few years ago. The Stuff article was by NZIER.

    [Could you please change your user name, as we already have a regular commenter here by the name of “bill”, who also happens to be an Author and Moderator. Thanks – Incognito]

    • lprent 5.1

      Yes – you’re correct. It was NZ Initiative, formed from Business Roundtable and NZ Institute that I was thinking of.

      Corrected post and noted change at the bottom.


    • Andre 5.2

      It doesn't look like you're the bill with a lower case b that's the author of numerous strongly opinionated posts and comments here. If you aren't, you may want to change your handle, or you might get some unexpected responses to your comments.

      • Incognito 5.2.1

        Thanks for that and I’ve changed the handle to make it clear. This commenter appears to be new here and whoever approved him didn’t pick it up either.

        I might drop a Moderation note, for good measure 😉

        Edit: in the back-end, I cannot see the avatar.

    • Incognito 5.3

      See my Moderation note @ 6:49 PM.

  6. Tricledrown 6

    Tsmithfield.Where is your evidence in times of low inflation printing/QE is perfectly fine so long as your economy has the productive capacity. Unlike say Zimbabwe.

  7. David Mac 7

    Ha, just back. I've found this thread as interesting as most of them.

    I dreamed up a 'Mooring Inspection' excuse this morning and peered off the end of the Mangonui wharf. I've been here for 12 years, for the first time ever I could look through 5 metres of water and see the bottom.

    Those lockdown views over Paris, it looks like the city of romance, rather that the city so polluted my eyes won't stop watering. Whats so bad about zui? We don't need to fly across the world, just zui. (The Kiwi take on tele-conferencing zoom/hui = zui). Why can't a doctor ask me to put a felt tip pen dot on where my elbow is hurting and hold it up to the camera, ask me to put my phone on my chest so they can hear my heart.

    We don't need to be rushing about all over the place all the time and it's high time we stopped it.

  8. David Mac 8

    Rather than the 24,000 of us in the hood running our 24,000 cars down to Pak n Save, we're dumb for not letting 7 electric vans do that job.

    • Incognito 8.1

      Don’t be naive!

      We’re hunter-gatherers and we must collect our food ourselves with our bare hands in the supermarket. We can’t just order it online and get it delivered at our doorstep by an electric van. Where’s the fun in that?

      We’re also creatures of habit with a pack mentality, which is what the Pak stands for in PAK'nSAVE. Why else would we stand in a queue for over an hour in lockdown when you can literally cross the road and walk straight into a Countdown? Why else would we do our groceries on Saturday when everybody else is doing the same thing at the same time? What more fun could we have than driving around hunting for a car park, avoiding other shoppers doing the same thing or the ones backing out of their car parks after collecting all their shoppings without looking in their mirrors? The joy of pushing your way through packed – there it is again – aisles and almost getting run over by other mad trolley drivers that could easily lead to trolley rage. The highlight is, of course, the queues for the checkouts and invariably picking the shortest but slowest queue. Why on Earth would we want to give all that up? Where would we get our adrenaline rush from? How would we stay in physical shape, keep our senses and instincts sharp, and fulfil our sense of purpose if we did not go shopping? Honestly, I cannot believe dreamers like you, they make no sense to me.

      • David Mac 8.1.1

        Shopping for food is a chore like rubbing clothes down a washboard. We should of put it out to pasture the day the internet was invented.

        Your choice is kicking a football to your Grandson or squeezing an avocado in the fruit channel at the food Hoover.

        We're all looking to kick a ball round that little kid in goal hey.

  9. David Mac 9

    My passion got the better of me, when I run numbers, 29 vans but you bastards get the idea. Sorry, I was trying to be hip, I'm sure your parents were married. I should stop trying trying to be hip and get in the queue for one.

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