Reserve Bank bond sales the height of madness


By Chris Leitch*

After going halfway to economic madness with its purchase of $53.5 billion in government bonds (IOUs for government borrowing) from the country’s commercial banks and financial institutions through of its large-scale asset purchase program, the Reserve Bank has now taken the plunge and decided to sell these bonds to New Zealand Debt Management (NZDM), a branch of the Treasury that handles government borrowing, which sold these bonds to commercial banks and financial institutions in the first place.

Thus, the government will borrow from other banks and financial institutions in order to be able to buy its own debt (bonds / IOUs) from its own bank (Reserve Bank) and pay a higher interest rate than that which he currently pays at his own bank.

Not only that, but the interest that the government paid to the Reserve Bank generated profits for the Bank which it pays to the government as the owner of the bank.

The loan effectively cost taxpayers nothing.

This will not be the case when the government borrows from commercial banks to buy the bonds which the Reserve Bank sells back to NZDM.

The new loan will be expensive for taxpayers.

And the cost will be significantly higher over time as more official exchange rate hikes, like the one just announced, are implemented.

The tax will go to the banks in the form of interest payments, adding to the huge and record profits they are already making.

If you tried to design a more ridiculous scenario, you’d be hard pressed to come up with one. This is the height of stupidity.

The Reserve Bank could have held these bonds until maturity, with the government paying the interest it recovered through bank profits.

When these bonds matured (the loans had to be repaid), the Reserve Bank could have simply written them off.

After all, why would the government want to repay loans to the bank it owns (repay itself), especially when the Reserve Bank is not a separate entity (such as a corporation) and ‘She didn’t use anyone else’s money to buy those bonds in the first place.

It was created on his computers – digital pixie dust – with government support.

This monetary creation was confirmed by the Deputy Governor of the Reserve Bank, Christian Hawkesby, who, questioned on TVNZ’s Seven Sharp program on April 30, 2020 where the bank received the money to buy government bonds, said; “We create electronic money to buy government bonds. Through this process, we create money.

This was doubly confirmed by the Bank’s Chief Economist, Yuong Ha, in New Zealand Herald to August 14, 2020; “We create money…that’s what central banks do and always have done, but then we exchange it for assets [government bonds] and these are on our balance sheet.”

Selling the bonds/IOUs back to NZDM (effectively government repayment of the loans) may be a nice accounting exercise, but that’s about it.

Inflows on both sides of the Reserve Bank’s balance sheet (assets and liabilities) will shrink, which would have happened if the bonds had simply been canceled – remembering that the digital money to buy them was created out of thin air in the first place.

But new government borrowing, needed to buy bonds the Reserve Bank wants NZDM to buy from it, will have to be repaid – even if commercial banks create money, the same way the Reserve Bank does. , when they buy bonds with it – and it will take an even bigger toll on tax revenue.

The tragedy is that this senseless madness will take money out of taxpayers’ pockets and transfer it directly into the pockets of commercial bank shareholders, large institutional investors and foreign pension funds.

Rather, these entities should invest in the country’s productive enterprises, strengthen economic activity, resilience, innovation and exports.

Instead, the government and the Reserve Bank help them dip into the pockets of taxpayers.

The effect of this stupidity for New Zealanders is that there is less tax money left over for public spending on hospitals, schools, poverty alleviation, homeless housing and infrastructure such as roads, railways, water supply and sewage treatment.

The funding required for these things will in future be borrowed from private investors – as for example with the proposed four new entities the government is setting up to take control of the councils’ water and waste water assets.

Funding for the work needed to bring this hydraulic infrastructure up to standard and cope with a growing population will in future be borrowed from private investors – commercial banks, large institutional investors and foreign pension funds, which will increase the burden on taxpayers ( who are all water users) which, through water royalties, will provide long-term, 100% secure and gold-plated profit to the rich of the world.

Taxpayers will pay twice and get less, all because the top priority is to ensure that the bond market (the gambling casino for the rich) offers plenty of “investment” opportunities.

The height of madness indeed, when the Reserve Bank could have provided its created pixie dust directly to the government at no cost to taxpayers, to spend on services for the kiwis.

*Chris Leitch is the leader of the Social Credit party.


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