Kate Raworth’s “Doughnut Economics” is a great starting point for new thinkers

Kate Raworth is an author who can’t be ignored. Google her book “Doughnut Economics” and you get 155,000 results. In September 2020 Goodreads had 549 reviews and Amazon 469 ratings. Her book is lucid and accessible and I love her chapter headings. She has an extraordinarily comprehensive list of references.(Some chapters have 90-100)

This is a comprehensive review of orthodox economics over a few centuries. Her “doughnut” metaphor describes the realm of a living habitat for humans as being only in the doughnut. We have to be lifted out of poverty to reach a certain minimum standard of living, yet not consume so much of the earth’s resources so that we are breaching planetary boundaries. Her doughnut is unforgettable and will go into future economics textbooks. She describes a social floor for wellbeing and an ecological ceiling. 

To illustrate her strong call to rethink economics she packs her chapters with a dense and interesting mix of facts and trends within economics thinking. The strength of this book is that because of Raworth’s deep understanding of the history of economic thinking she is acutely aware she is just but one thinker in a chain, and that there will be another generation of thinkers beyond her. She regularly invites her readers to think our way out of this mess and tempts us with numerous leads. She is an advocate of drawing diagrams. 

However naturally there are omissions and blind spots. 

Naturally when reading a new book on new economics (I have written two) I go straight to their bibilography and there I find a good list on the topic of money and an excellent one on tax –Gaffney and Harrison, Henry George, Michael Hudson, JS Mill, Ricardo, Josh Ryan-Collins and Peter Barnes. I also find Michel Bauwens on the commons and Janine Benys on biomimicry.

So here is what I think a list of what the next generation of thinkers could productively focus on:- 

First Omission – asking what is the root cause of the growth imperative?

One of the more irksome features of her discussion is that she never really asks what causes the growth imperative. She doesn’t appear to stress that it is built into the system. While she cites many who write on money creation including Benes and Kumhof, Charles Eisenstein, Michael Hudson, Steve Keen and Bernard Lietaer but never seems to use the phrase “interest-bearing debt” or explore the consequences of issuing money this way. She dabbles but pulls back when it comes to probing important leads. I urge thinkers to read Chapter 2 of economist Richard Douthwaite’s book The Growth Illusion, where after a discussion about the consequences of issuing money as interest bearing debt, he concludes. “In our present economic system, the choice is between growth and collapse, not growth and stability…The alternative is slums, dangerous roads, old factories, cramped schools and stunted lives.” Douthwaite, like Raworth, was a development economist who spent years on overseas aid work,  and in the process he had to spend time relearning and unlearning economics. 

Second Omission – the role of power

When I was a  full time advocate in the smokefree campaign in the 1980s, I watched public opinion change over a decade of debate and conflict. I was high profile in the media for a decade. On non-smokers’ rights I was a controversial figure in many households, workplaces and clubs. The health lobby, equipped with all the scientific facts, gradually and painfully learnt the reality of political power. We started to understand the subtle influence of the tobacco industry, and came to realise that the frustrating reluctance of politicians to move was because they were waiting for public opinion to change. So I always notice when an academic advocates for change and appear to imply it happens without pain and struggle. The famous quote of Mahatma Gandhi, “First they ignore you, then they laugh at you, then they fight you, then you win” is relevant here. So even a passing reference to the role of power and the agony of the political struggle would have been helpful here.

Third Omission – the importance of currency design 

Kate Raworth leads us to the insightful author Silvio Gesell, summarises his argument for a demurrage currency, chooses the best quotes from him, and then pulls back. I urge the next generation of thinkers to follow through this clue, because the design of money changes everything, from purchasing behaviour to investment patterns. If Keynes called Gesell ‘an unduly neglected prophet’ we should really pay attention. She has a whole chapter called ‘Design to Distribute’, but completely omits the critical nature of currency design. 

She has read Bernard Lietaer, or at least one of his books, but the next thinkers should read the more of Lietaer and think deeply about his argument that the design of money affects human economic behaviour and that there are good examples in history of a dynamic, successful societies where dual currencies contribute to this result.

Fourth Omission – Energy Decline

I am not sure I do it justice either, but those who understand that because of peak oil the net energy in the industrial system must decline, also know that we have to live with progressively less net energy. That is a big concept because economic growth has for decades been closely correlated with energy growth. 

When it comes to discussing the regenerative circular economy,  where the essential concept is to ensure we can unmake everything we make. I am not sure how this fits with the Second Law of Thermodynamics says that processes that involve the transfer or conversion of heat energy are irreversible. … It  also states that there is a natural tendency of any isolated system to degenerate into a more disordered state. As energy is transferred or transformed, more and more of it is wasted. So the circular economy is not that simple.

I am rather inclined to agree with a University of Otago scientist Craig Anderson who recently wrote on an email discussion, “Concepts like Doughnut Economics will not achieve what we need – they sound lovely and the heart is definitely in the right place – but these concepts are still not yet grounded in the realities of the remaining resource base and energy constraints.”

Fifth Omission – Land Tax reform

She has spent a few pages on Henry George who would replace income tax with land value tax and on the origins of the board game Monopoly. This occurs under the chapter heading Design to Distribute. But she doesn’t really convey that land tax is the most powerful way to distribute wealth. Those wanting to take this topic further should learn about the value of inner city land, not just rural land and learn from Georgist organisations like Progress in Australia for more information. A discussion of the relative merits of capital gains tax, land value tax, death duties, wealth taxes, estate taxes would have been useful.

This book is a must read for any critic of orthodox economics. Raworth concludes, “We are all economists now”. So if we are to survive, we can’t avoid this discipline. 

 

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Proposed new local spending currency can only work with a full land rent

Council owned land Manukau. The other property owners get unearned capital gains from rise in land value.

Two of my previous posts have advocated local authorities get authority from Government to issue a new currency which decays like ordinary goods decay. It would exist alongside the national currency. Because it decays, it will circulate much faster than the national currency, the rate being dependant on the rate of decay.

The previous idea was to do what the Mayor of Wōrgl, Austria did during the Great Depression in 1932, to spend it into existence by paying part of the wages of council employees in that currency. In the case of Wōrgl that was a Work Certificate that had to be stamped every month. Owners of the certificates would have to buy a stamp every month worth 1% of the note’s face value. That means over 12% a year of decay, or a -12% interest rate. Well that turned out to be big because the certificates circulated so fast that the town had to withdraw a large percentage of the notes from circulation.

Continue reading “Proposed new local spending currency can only work with a full land rent”

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Best leverage points for changing a system like the economy

Right now many groups round New Zealand are doing a lot of thinking about how we might build back better after the pandemic. They are identifying issues and making recommendations, whether it be on addressing climate change properly, facing the wealth disparity or generally working towards a world with a future for humanity.

But where should we intervene in the global or national political economy? It’s easy to suffer from overwhelm of ideas and information so it might just  be helpful to think about which interventions would have the most leverage. Would a small intervention somewhere have a big effect?

Donella Meadows, a systems analyst focused on environmental limits to economic growth did a lot of thinking on this topic during the 1990s and wrote a classic piece. She identified twelve leverage points to intervene in a system. A complex system could be a firm, a city, an economy, a living being, an ecosystem or an ecoregion.

12 Leverage points of Intervention in a system

 

So I am just going to deal with the first three which bring the greatest results. They are also the hardest ones to move. Here is a quote from Wikipedia

“3. Goal of the system

Changing goals changes every item listed above: parameters, feedback loops, information and self-organization.

A city council decision might be to change the goal of the lake from making it a free facility for public and private use, to a more tourist oriented facility. That goal change will effect several of the above leverage points: information on water quality will become mandatory and legal punishment will be set for any illegal effluent.

  1. Mindset or paradigm that the system — its goals, structure, rules, delays, parameters — arises from

 

A societal paradigm is an idea, a shared unstated assumption, or a system of thought that is the foundation of complex social structures. Paradigms are very hard to change, but there are no limits to paradigm change. Meadows indicates paradigms might be changed by repeatedly and consistently pointing out anomalies and failures in the current paradigm to those with open minds.

A current paradigm is “Nature is a stock of resources to be converted to human purpose”. What might happen to the lake were this collective idea changed ?

 

  1. Power to transcend paradigms

 

Transcending paradigms may go beyond challenging fundamental assumptions, into the realm of changing the values and priorities that lead to the assumptions, and being able to choose among value sets at will.

Many today see Nature as a stock of resources to be converted to human purpose. Many Native Americans see Nature as a living god, to be loved, worshipped, and lived with. These views are incompatible, but perhaps another viewpoint could incorporate them both, along with others.”

Donella Meadows wrote, “The shared idea in the minds of society, the great unstated assumptions, unstated because unnecessary to state; everyone knows them‚ constitute that society’s deepest set of beliefs about how the world works. There is a difference between nouns and verbs. People who are paid less are worth less. Growth is good. Nature is a stock of resources to be converted to human purposes. Evolution stopped with the emergence of Homo sapiens. One can “own” land. Those are just a few of the paradigmatic assumptions of our culture, all of which utterly dumbfound people of other cultures. Paradigms are the sources of systems. From them come goals, information”.

 

 

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A dual currency system would help New Zealand recover

Covid-19 in New Zealand has resulted in the loss of thousands of jobs, including from Air New Zealand, Auckland Council, Fletchers, Millennium hotels, Sky City, Ngai Tahu and Bunnings. With the first round of wage subsidies ending in June and the second round ending in September there will be thousands more jobs to be lost. Despite the fact that on Monday 8 June we moved to Level One and we can all move around normally within our country, there is no sign of overseas tourism starting up again or Air NZ getting back to 2019 levels within the foreseeable future.

The economy is a gigantic machine in which one person’s consumption spending generates someone else’s income. We buy the things we want and need, and in exchange give money to the people who produced those things, who in turn use that money to buy the things they want and need, and so on, forever.

But right now it is not looking good. Spending money at your local cafe won’t cut it. The OECD said in its Economic Outlook 2020, “The global economy is now experiencing the deepest recession since the Great Depression in the 1930s, with GDP decline of more than 20% and a surge of unemployment in many countries.” New Zealand can’t escape.

The Government has already responded with a wide range of schemes to help keep jobs and businesses. The Reserve Bank has lowered interest rates and gone on a spending spree in the secondary market buying up NZ Government bonds which they believe will lower interest rates further. They also lifted Loan to Value Ratio restrictions for commercial banks lending. In other words they want banks to lend money. In a recession businesses and individuals are loath to invest or borrow, so the Reserve Bank wants to make it easier for them.

Naturally all these actions from RBNZ have kept the property market from falling in most regions. Pity about the fate of some young couple with a small deposit a year out from now when their house value declines! The Reserve Bank has sent them out to buy a house now, because of course property owners have total privilege in our tax system. They are exempt from land value tax, capital gains tax, wealth tax and inheritance tax. The only way they pay for the privilege of monopolising a site is when they pay their rates and that is certainly nothing near the capital gain they will enjoy later for doing nothing to their land but enjoying the development all around.

Tax issues aside, let’s get on to the circulation of money round an economy. The Dominion Post two days after we started in Level One had the following front page headline, “Wellington, let’s get spending”. Yes we are urged to spend, and yet the Retirement Commissioner urges us to save for our retirement, and those wanting to buy a house naturally want to save a deposit. So we get two opposing messages from society. Apparently we paid off $1 billion during lockdown on our credit cards and this is bad for the economy because every time a debt is paid off there is less money in circulation.

Two Conflicting Functions of Money

Most people are not aware that our NZ dollar has to act in two conflicting ways, as a both medium of exchange and also as a store of value. It simply can’t do both at the same time. That is a problem. It should be one or the other.

Every time a sale is made both the seller and buyer benefit. So the argument goes the more transactions we have the bigger the benefit for the whole economy. The total sales expenditure is the country’s GDP which was around $203 billion in 2019.

In deflationary times it is well known that consumers hold back on their spending and the velocity of circulation declines. People also pay off credit card debts and mortgages, taking money out of circulation. When they do this the money supply declines if banks aren’t making new  loans or the Reserve Bank doesn’t print more digital money. And with all the Covid-19 unknowns and with the possibility of cheaper prices tomorrow or less income tomorrow, consumers hold back even more.

A Dual Currency System is needed

What is needed therefore is a dual currency. One, the national dollar is useful for buying imported goods and for paying taxes. It can be a saving currency as well as a spending currency. However, because these functions conflict, we need a currency that is a spending currency only. Like ordinary goods, the currency will rot or decay or go out of date.

There are two ways of starting up such a currency:

  1. Give local authorities the power to pay their employees partly in rates vouchers redeemable only by that local authority and make those vouchers decay at something like 8% a year.
  2. Do it nationally. That would involve chartering a new bank and having it issue a new currency. The bank would be essentially a second Reserve Bank with a different name. Spend the new currency into existence through paying for part of the budget on health, education or transport or anything else the government does.

The advantage of the local option is that it is in line with what happens in Nature, a system within a system. But the disadvantage is that when it comes to the practical matters of having a new digital only currency with two currencies on  an EFTPOS card, there are too many local authority currencies (78 of them) and too much complication. However the Government itself will not accept these new currencies for taxes and nor should they. The issuer of the rates voucher is the local authority itself and when the voucher is paid to Council in rates and is redeemed, it simply disappears.

The advantages of having a second national currency is that the EFTPOS dual currency card system is simple. There would be only two currencies in the country. The disadvantage is that the new consumers could favour buying from one region over another leading to unplanned centralisation. Then there would be too much internal transport required in New Zealand which would not be efficient. Duplication occurs in Nature and is perfectly logical. For instance you can grow pumpkins or potatoes or apples all around the country so it makes no sense to centralise this activity.

Investment

Right now businesses aren’t investing. They are reluctant to upgrade their software, buy new plant, add new employees, educate their employees, or recruit a top executive. Like individual consumers, businesses are sitting on their capital and waiting to be more certain of the future.

What about those with money? Are they investing in business? We know we have to build back better because of the constraints on energy use. A successful energy transition will entail moving away from a growth based consumer economy to an entirely different way of organising our investments. The rising stockmarket since just after lockdown shows investors had unrealistic optimism for weeks. But US stocks tanked on Thursday 11 June, as cautious commentary from the Federal Reserve and rising coronavirus infection rates prompted investor concern. All three major indexes posted their biggest single-day declines since March 16.

But imagine we had a second currency operating and it had a circulation incentive built into its design. Its value declines as time passes. What would you do with it? You can’t save it. We wouldn’t fill our houses with cheap imported Chinese goods because we need national dollars to buy imported goods. And we wouldn’t buy more imported cars.

I think, as in previous civilisations where a spending currency existed alongside the national currency, we would save in the form of tangible investments. When we had spent on personally useful things for the future, we would work communally to industrialise in a 21st century style production. We might form a cooperative buying up 3D printers and appropriate materials. Another group might grow bamboo or hemp. Another group might start an orchard and pay workers. Another cooperative would set up a clothing factory. We could invest in art, spend up large on local entertainment. The arts would thrive.

Oh, and as I wrote this I needed to do something with the dispensing box my baking paper came in. What a waste to put it in landfill! People with local spending money itching to be spent might even find it profitable to buy up waste and do some imaginative upcycling. Maybe.

Previous civilisations give us clues

What happened in the Central Middle Ages from 1150-1300 approximately in Europe? They had a dual currency system with the spending currency being used in communal efforts to build cathedrals that would bring pilgrims who would be a source of future wealth. So it was a community that did the investing. See here for more details.

What happened in Wōrgl, Austria in 1932-33 with a dual currency? In 15 months the council paved roads, built a ski jump,  built a bridge and renewed their reservoir. Once again it was a communal effort in infrastructure that benefitted everyone. Also unemployment levels declined.

And in PreDynastic Egypt they invested in education and produced new knowledge in astronomy, mathematics. They maintained their waterwheels and their wine presses. Dressmakers and laundrymaids could read. They fed their population well.

The logistics of the implementation are not underestimated here. Granted there are major barriers to adopting a second currency, not the least of which is persuading businesses to keep two sets of accounts and all the technical issues of EFTPOS machines with more than one currency. There is also a challenge to ensure that the local currency remains on par with the national currency. The biggest one of all of course is that the tax system needs to be changed first so excess spending money doesn’t result in unearned profits from land speculation. All these are not addressed in this paper, but it is not being too hopeful  to believe that enterprising and clever New Zealanders can solve them all.

 

 

 

 

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Councils should have power to create rates vouchers

Councils should have the power to create rates vouchers

Recently we heard from Auckland Council about their dire financial situation. The Herald reported 23 May 2020 that they had “put together a $65 million hardship package for people struggling to pay rates as a result of the Covid-19 pandemic. They were also looking at reducing some services temporarily and selling or leasing more non-core assets.”

Mayor Phil Goff “has firmed up a Herald report this week that council stands to lose $500m in the next financial year”, saying the council expects to have $550m less cash and it is conducting a review of jobs with redundancies likely.

Frankly this is not on. As citizens we rely on councils for potable water, sewage disposal, community halls, swimming pools, libraries. Without functioning wastewater systems we would have floods every time there was a downpour. After the 2001 earthquake Christchurch citizens told us how important it was to have water and it was more basic than having electricity.

In January Hutt City Councillors held initial discussions about what’s been recognised as a national challenge facing local government – funding the renewal of water infrastructure, with some estimating the investment required across the country to top $17.2 billion over the next decade.

And then there are the wastewater and stormwater systems to maintain and upgrade. The ‘three waters’ deliver public health, economic and quality of life benefits for communities.

So we solve one health crisis and are threatened with another.

For years Councils have been telling central government that they can’t continue to require higher standards for the purity of water and other legislative requirements without the matching funds to do this. The burden of climate adaptation falls mostly on councils as they struggle to get their wastewater systems upgraded to cope with more severe floods. They are faced with having to retreat from the coast after coastal erosion has made sea walls impossible to keep rebuilding.

The Fox River landfill disaster after a downfall in southern Westland was the first of many.  Almost 20 historic landfill sites in the Tasman district are at risk of being exposed by storm surges and sea level rise. Auckland has 89 of the 112 landfills nationwide at risk from just half a metre of sea level rise, and dealing with them may come down to excavating and completely moving them.

In summary Councils have too little money for too much responsibility and that includes keeping residents safe from big weather events and from health hazards of declining water standards, rising sea levels, waste pollution.

The Covid 19 situation means that local authorities now face rates defaults and deferrals, especially from business. We are now in a situation where, no matter how much we all want to support local businesses, in reality after our first burst of enthusiasm we are more reluctant to part with our dollars and just walk past the cafe. Just hold on to the money, you might need it in the future, says our lockdown brain. The problem is we have a currency that is trying to be a currency for saving and a currency for spending at the same time, and these functions clash, particularly in deflationary times.Councils need another superpower

Now we come to the suggestion. Various schemes have arisen  in communities since the lockdown.

SOScafe.nz was set up in March by David Downs following the announcement. Through the site people can buy vouchers or gift cards for their local cafe and restaurant, which can be redeemed at a later date, ‘when this is all over’.

This morphed into SOSbusiness.nz. You can now buy vouchers for businesses in 28 regions of New Zealand online. Garden centres, local hardware stores, cafes, greengrocers, hairdressers and dressmakers are all in. Everyone is asking the question: How do I support my local businesses? What can I do for my community economy? The only trouble is that to date the councils haven’t considered themselves part of the action. And of course the single store vouchers have a very limited life. A voucher is bought then redeemed at the issuer’s store and then it is all over. It doesn’t circulate any more than this.

This proposal is that only when it is redeemed at the council for rates it is cancelled because you only need one issuer, the Council. When it comes back to Council in the form of rates it is cancelled. The rest of the time it circulates as a currency in the community. Unless this local voucher is redeemable for the payment of something essential like rates  it will not circulate properly. That is what gives it its value.

Time for a New Superpower for Councils

Unprecedented times means we consider what was previously unthinkable. Local Councils have legislative power to levy rates on homeowners, but they do not have the power to issue money. As Reserve Bank Chief Economist Yuong Ha told broadcaster John Campbell on Tuesday May 19th, the Reserve Bank has this power to create money . “It’s our superpower”, he said. “Just as the Government’s superpower is to levy taxes and change them.”

So if we gave Councils the power to issue money, what would that look like? It could be in the form of a rates voucher, good for the payment of rates to that Council. The former leader of the Social Credit Party Bruce Beetham when he was Mayor of Hamilton in 1976 proposed financing municipal projects with “rates vouchers”, but the council’s lawyer advised it was illegal and it never got any further.

It is time to make these vouchers legal. In order that they facilitate as many transactions as possible and do as much good as possible they should be designed to circulate fast within the council’s area. So they should decay in the same way as ordinary goods decay. Manufacturer Silvio Gesell in the late 19th century’s Long Depression had unusable goods in Argentina warehouse, while he noticed those with money just hoarded it or increased their money due to interest. He argued that money if it is to represent goods must have the same undesirable qualities. He wrote,  “Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether.”

The Miracle of Wōrgl

After decades of attracting loyal followers, during the 1930’s Great Depression, Silvio Gesell’s ideas were put into practice.  In the small town of Wōrgl, Austria 1932 the Mayor put aside 20,000 schillings and used them as backing for notes called Work Certificates. They paid their employees partly in Work Certificates. Each note had 12 spaces on the back and a stamp had to be stuck on every month to validate the note. To avoid paying for the stamp people spent the Work Certificates quickly. Locals paid their taxes early to avoid the penalty. The city paved roads, built a bridge, a reservoir and a ski jump. Unemployment declined dramatically in the area – in stark contrast to the ongoing unemployment in the rest of the country. The currency was so successful that people came from miles around to witness what they called “the Miracle of Wōrgl”. But within 15 months, after pressure from commercial banks, the government made it illegal and Wōrgl went back to unemployment.

Of course nowadays  we don’t need actual notes. Paying in local vouchers can be done electronically and this would probably require the Eftpos terminals to accept two different currencies, one local and one national. I’m sure this challenge can be met. And in these extraordinary times Government must contemplate changing the laws to make these local rates vouchers legal tender. Otherwise any venture would be short lived. They will be victims of the same bank tactics as in 1933 Austria. We must learn from history.

Safeguards needed

Of course built into the legislation there must be a provision to control for inflation. The Reserve Bank has very limited ways of controlling the money supply these days. They can keep interest rates down to stimulate lending from commercial banks and force banks in other small ways. Fortunately with rates vouchers there are two methods of controlling inflation. One is to limit the number of vouchers spent on labour. Wōrgl found that after a very short while they had to withdraw about a third of their notes because they were circulating so fast they were causing prices to rise. The second is to adjust the rate of decay. Like your Flybuy points they drop off if you don’t use them. This rate is not just -1%  a year. Wōrgl started off with a -12% rate, which was obviously too strong. So there will have to be  local currency control committees everywhere for this job, perhaps elected.

This would save councils, ratepayers, businesses, and customers precious national dollars. It would provide councils additional funding for necessary local  projects, and be especially useful for paying labour. When our very health is at risk Government can’t go on watching Councils suffer. Nobody wants libraries or pools to close or sewage to flow down the rivers. Nobody wants decaying infrastructure or broken roads.

The second safeguard is this. The late Jeanette Fitzsimons, when asked her opinion on this currency, said she would worry that the last trees would be cut down, the fish would all disappear and all the  rivers would be dammed. So it will throw up the urgent need for strong and effective resource taxes to prevent this.

“Buy local” on steroids

Public discussion so far has largely focussed largely on the huge Quantitative Easing programme of the Reserve Bank  to buy Government bonds to stimulate the economy.  Yes we need more money in the economy. But the velocity of circulation has been a neglected factor in kickstarting the economy. This can be achieved by having a well designed new currency working alongside the national currency. When vouchers have a circulation incentive they itch in your mobile phone, asking to be spent. The voucher’s design changes the consumer’s mindset. It is a spending currency. The national currency is our saving currency and is used for buying imports like petrol, machinery, spices, coffee and cars.

A voucher designed this way would stimulate the community economy like nothing else. Here is how it might circulate within the local economy. A clerk at the Council receives rates vouchers as part of her pay. She spends some of them at the dressmaker who spends it at the wine shop. The wine shop owner spends it on fruit trees at the garden centre. That owner spends some of it at the dairy. The dairy couple, who have accumulated a lot of vouchers that week, decide to pay their rates in rates vouchers early before the penalty happens.

If we want now to implement the “buy local” mantra and have thriving local economies, we have to learn from experiences in the Great Depression and step out boldly. Given the appropriate safeguards the Reserve Bank could well agree with the idea. If the Reserve Bank was happy, the politicians would hastily amend the various laws to lift us out of this awful economic crisis.

Deirdre Kent is the author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems, 2005 and The Big Shift – Redesigning Money, Tax, Welfare and Governance for the Next Economic System, 2017. She lives in Waikanae. She is involved in the Living Economies Educational Trust.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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It’s our Superpower to create money says Reserve Bank chief economist

On Tuesday 19th May John Campbell, host of TVOne Breakfast, interviewed  Yuong Hu, Chief Economist of the Reserve Bank of New Zealand and asked him about printing money. If the Reserve Bank is going to buy billions of dollars in Government bonds where does the money come from?

Q. Is Quantitative Easing the same as printing money?

A. Well the process is very similar. But rather than being bedazzled by the term Quantitative Easing (and us economists love throwing around these fancy terms), it might help if I can set the scene. I think the name of the game is still the same. We want to lower interest rates. The economy is taking a big hit right now. It needs all the support it can get. And the central bank can provide that support by pushing interest rates low and keeping them low. So we have got to find different ways of getting interest rates down. Quantitative Easing is a fancy name. You probably would have heard of the OCR. That is a more traditional way of doing monetary policy but we are now using Quantitative Easing. A good analogy would be the OCR is like 10 man rugby – very traditional but Quantitative Easing is (inaudible) backline.

Q. Are you printing money? Are you somewhere out the back with the printer?

A. Metaphorically we are. That’s one of our special powers. Central banks can print money or create money. These days it’s done electronically. We’re in a digital world. It’s not analogue. We are not physically up there turning the crank and the handles and money coming out. If I can I can use a simple analogy. There are retail interest rates like mortgage rates and these set at a margin  above the wholesale interest rates. We pay the retail price. We are  trying to do with Quantitative Easing is to lower the wholesale interest rates in the economy, in this case Government Bond rates. Then banks can pass on the lower rates and this will lead to lower mortgage rates and lower business rates.

Q. Yes but can I come back to my obsession? But you are creating money. Who gives you the right to do that? Who says you can?

A. Well the Government does. I mean it’s written. It’s our superpower if you like. Legislation says that. All central banks have that power, just like Government has the power to levy taxes and change taxes. Central banks have the power to create money.

Q. When the Government eventually repays you what happens to the money?

A. It gets unprinted. When that money gets repaid, it sits on the Reserve Bank’s balance sheet and we just metaphysically destroy it by undoing it with a few keystrokes.

Q.  It just ceases to exist. Boy. You can see how people get confused by this, can’t you?

A. I think people get confused by the Quantitative Easing. To the uninitiated it feels astounding, but central banks actually do this on a daily basis. We have been in the business of creating money for years. There is nothing untoward about it. We have done this for many decades. It’s just that it has grabbed all the headlines. It’s like finding out you can lift the line-out jumper.

End of interview

My take on this is that he didn’t spell out the mechanism by which interest rates are lowered. I understand from a letter that Grant Robertson wrote to Amanda Vickers that buying bonds on the secondary market, that is from banks in NZ and overseas, pension funds and other institutions is the method they prefer because it lowers interest rates, or is supposed to.

However my belief is they should buy bonds directly from Treasury because it then Treasury has a debt to another branch of Government and the debt can just lie on the books. There is no need for repayment. This is the big difference between what they are doing now and what would be best for taxpayers. I read that Grant Robertson and those in RBNZ have not ruled out this possibility. It is just that they had better get on with it because one bank economist estimated the other day that RBNZ is buying at a rate of $1.1 billion a week.

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The Minister of Finance replies to a plea to use monetary financing

Amanda Vickers of Waikanae wrote in March to the Minister of Finance and here is his reply.

16 April 2020

Amanda Vickers 

Dear Amanda

Thank you for your email on 27 March 2020 regarding the Large Scale Asset Purchases (LSAP) programme. In particular, I note your suggestion that the Reserve Bank of New Zealand buy bonds directly from the Treasury rather than using the secondary market.

On 23 March the Reserve Bank announced a LSAP programme of purchasing New Zealand Government bonds on the secondary market. This followed the Monetary Policy Committee’s decision that further monetary stimulus was needed to meet its inflation and employment objectives in the light of intensifying economic implications of the coronavirus. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities in the secondary market over the next 12 months.

The LSAP programme is designed to help the Bank meet its economic objectives of keeping inflation low and stable and supporting maximum sustainable employment. The Bank would normally do this by changing the Official Cash Rate (OCR). But the OCR is currently at an historic low of 0.25 percent, therefore it is using LSAP as another tool to lower interest rates.

While central banks have the option to purchase bonds directly from government treasuries, the Reserve Bank is currently making its purchases in the secondary market. Doing so can influence the bond markets to reduce longer term interest rates thereby reducing the cost of borrowing for households and businesses. It will also enable the sellers of assets to use the money they receive from the Reserve Bank to switch into other financial assets, such as new lending. These are effects that could not be achieved through the direct purchase of government bonds from the Treasury.

The Reserve Bank will continue to follow developments and has the option to take further action to support stability in New Zealand’s financial system – such as widening the asset classes that could be purchased under LSAP. Purchasing Government bonds directly from Treasury is one such option that could be taken up by the Monetary Policy Committee if it were deemed appropriate and consistent with financial system stability.

Thank you for your interest and taking the time to raise your views.

Yours sincerely

Hon Grant Robertson

Minister of Finance

 

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This is a better way to raise all those billions Grant!

Recently I wrote to the Minister of Finance the following letter. I have not had a reply or an acknowledgement of receipt to date (ten days later)

18 April, 2020

 

Hon Grant Robertson

Minister of Finance

Parliament Buildings

Wellington

 

Dear Grant,

In the middle of all the work you and your teams are doing, you and Adrian Orr are about to make a decision that will greatly affect the lives of New Zealanders for years to come. You have to decide how you will borrow a great many more billions (we understand Parliament has authorised up to a total of $52 billion) to fund necessary infrastructure and government support.

Those of us who have family including grandchildren and great grandchildren don’t want them as future taxpayers to be beholden to some massive overseas finance institution like the Bank of America, JP Morgan Chase or Goldman Sachs and paying interest and capital back year after year.

WE WANT YOU TO DO WHAT THE GOVERNOR OF THE BANK OF ENGLAND HAS JUST DONE – TO FUND IT, OR AT LEAST PART OF IT, BY MONETARY FINANCING. THAT MEANS THE RESERVE BANK BUYS BONDS DIRECTLY FROM TREASURY AT ZERO INTEREST.

See this article from the latest (18 April) Economist where Andrew Bailey changes his mind within four days and says “it is better to be right than be consistent”.

As you know with deficit spending there is no great hurry to pay the principle as the overdraft could just sit on the central bank’s balance sheet for as long as the Government wants.

We don’t believe it is necessary to wait until public opinion is strongly behind this move, but we are working hard to extend and strengthen the coalition of organisations and prominent economists behind this move.

The following organisations or individuals that support this move appear to include Social Credit, Positive Money, Living Economies Educational Trust, Bernard Hickey, Shamubeel Eaquab, Geoff Bertram and yesterday BERL Ganesh Nana said on Morning Report the following:-

Economist Ganesh Nana of BERL. Morning Report 16 April 2020. Second half of interview. 

“Government must underpin economic activity. Government is the backstop, both central and local government. It is important not to go down the austerity track. Government debt is not always bad there are ways we can borrow and we use and others have used the term “helicopter money”. Government can borrow from The Reserve Bank. It is literally borrowing from itself. I noticed that many in New Zealand have an allergy to government effectively printing money. It has consequences but it is an element that government should not only explore but utilise. There are implications of course – you are running down the value of those who have assets. The value of my mortgage free house might decline a bit. And you benefiting those who have mortgages and other debts. We should not close off all the options just because someone told us 30 years ago it was bad.”

Question: Could you please ask Treasury to estimate the difference in the cost of the two alternative measures and publish the outcome? We as the public need to know.

 

Sincerely

Deirdre Kent, author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems and The Big Shift – Redesigning Money, Tax, Welfare and Governance for the Next Economic System

 

 

 

 

 

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Time to halt privatisation of high country

Although about a fifth of the South Island high country is owned by Government and leased out to runholders, this is changing. Since 1992 the Government has allowed the privatisation of leasehold land. Called “tenure review” it involves an unusual deal and the government loses. The runholders because of their input into the farm claim the improvements belong to them. They end up getting part of the farm for a song. No I am wrong – they sometimes make money on the deal by a strange mechanism. And then they flip it on, making millions in the process. The less valuable land is kept for conservation. There is something strange about the land valuation process.

So why on earth does the public purse lose? To retire the pastoral rights, the Crown paid runholders $36 million (or $656/hectare). That is ridiculous. It is all explained by Dr Brower in April 2107 here and the Environment Court at that stage made a case for stopping freeholding of land in the McKenzie Basin.

The picture above from Stuff shows this week’s protest by Greenpeace about a farm near Twizel where the farmer wants to run 15,000 cows. Many local farmers and even Fonterra joined Greenpeace in opposing this dairy conversion.

All the figures and stories are given in her post and she ends by saying “The best, easiest, and cheapest thing New Zealand could do for the land and water of the South Island is to stop high country tenure review. Better late than never.”

As Charlie Mitchell from Stuff points out, the best land stays in pastoral use and the deal is skewed towards the wrong side. “You might assume that ownership rights to valuable land would be worth more than occupation rights to less valuable land. But the Crown believes the opposite, so it has purposely lost money through these deals.”

More recently we saw the headline “Flipped. From zero to $17.5 million.” This involved a lakeside property on Lake Hawea. Previously under tenure review the farmer had been paid $2.2 million by the crown and had paid nothing in return. Then he onsold it for $17.5million. Flipped from zero to $17.5 million by Charlie Mitchell. An earlier article is one on McKenzie country

Of course after privatisation the owner can subdivide so by April 2017 what used to be about 120 leaseholds is nearly 4000 parcels of freehold land.

The Minister of Lands Hon Eugenie Sage has her work cut out to change this situation.

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Interview on the Big Shift

Half hour interview with Karl Fitzgerald of Prosper Australia on the Big Shift. https://www.mixcloud.com/RenegadeEconomists/

I was surprised when I played it today how animated I sounded. Now I need to finish promoting this book and get on with writing the next one, probably entitled Emergency with a subtitle about the need to have a climate currency and how it could be applied.

The notes are on Karl’s site

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