Councils should have power to create rates vouchers

Last weekend we heard from Auckland Council about their dire situation regarding rates. 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, reliable sewage, community halls, swimming pools, and without 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. 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.

Water supply and effective wastewater and stormwater systems ensure urban environments function properly. In addition, 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 services without the matching funds to do this. The burden of climate adaptation mostly with  councils as they struggle to get their wastewater systems up to scratch to deal with more frequent and severe floods, and 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 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.

Then to add to Councils woes, today the Minister for Building and Construction Minister for Building and Construction announced that  Government is scrapping the need for consents on low-risk building work, such as sheds, sleep-outs and carports.

This will allow the construction sector to kickstart important work on larger projects, providing more employment opportunities and assisting New Zealand’s post-COVID recovery. Right, that is less money for already struggling councils.

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.

We are now in a situation where, no matter how much we want to support local businesses, in reality after a first burst of enthusiasm, we are more reluctant to part with our dollars. There is no penalty for doing so. That is the problem. We have a currency that is trying to be a currency for saving and a currency for spending, and in deflationary times these clash.

Councils need another superpower

Now we come to the suggestion. 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 Yuong Ha told broadcaster John Campbell last Tuesday, 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, dominated by his opponents, passed a 20 percent rates increase instead. And the council’s lawyer had also advised it was illegal.

It is time to make these vouchers legal. I believe they should be designed to circulate fast within the council’s area. They should decay like ordinary goods decay. Manufacturer Silvio Gesell in the late 19th century long depression, caught out with unusable warehouse goods in Argentina, while those with money hoarded it or increased their money due to interest, 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 depression, Silvio Gesell’s theory was put into practice, but only briefly.  It was in the small town of Wōrgl, Austria 1932 that 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 contrast to the ongoing depression in the rest of the country. The currency was so successful that people came from miles around to witness 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 which decayed and one national. I’m sure this challenge can be met.  And in these extraordinary times Government must contemplate changing the laws to make this possible. Otherwise any venture would be short lived. We must learn from history.

Inflation safeguards needed

Of course built into the legislation must be a provision to control for inflation. Fortunately 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 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. This rate is not just minus 1-2 percent a year. They 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 have limited hours. Nobody wants decaying infrastructure or neglected parks and playgrounds.

Public discussion so far has largely focussed on the huge Quantitative Easing programme of the Reserve Bank  to buy Government bonds to lower interest rates.
The purpose is to increase the money supply and lower interest rates to stimulate the economy.  But the velocity of circulation has been a neglected factor in kickstarting the economy. This can be achieved by designing and introducing this a new decaying currency working alongside the national currency. The local currency has a circulation incentive. The vouchers itch in your mobile phone, asking to be spent The design changes the consumer’s mindset. It is a spending currency. The national currency can be a saving currency.

This new money would stimulate the community economy like nothing else. Local businesses would have to be persuaded beforehand  so that they promise to receive this as payment and then they could pay their employees partly in local vouchers. Councils would have their rates paid and the threat of crumbling infrastructure would disappear.

 

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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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Summary of The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System

The Big Shift: Rethinking Money, Tax, Welfare and Governance for the Next Economic System by Deirdre Kent

This important little book is a very dense read. The current growth-dependent economic system is not only broken must be completely replaced with a new paradigm.

This is now critical. Conventional oil peaked in 2005 and unconventional oil peaked in 2015. It takes energy to extract energy so the global net energy is inexorable decline. Therefore the economy can’t grow with less energy from fossil fuels to drive it. Therefore the economy can’t grow without more and more debt.

Based on the discussions of the New Economics Party of 2011-2015 to develop policy, the author argues that neither monetary reform nor tax reform are possible at central government level as the banks are too powerful these days. A change from an intrusive welfare system to a basic income should come from sharing the rents from land, natural resources and natural monopolies.

To design an economic system to serve the planet in a post fossil fuel age requires new thinking on money design, land tenure and governance. Examples from history are used as evidence of stable and prosperous societies using these principles.

This leads to the conclusion that very local government should assume powers of money creation, land purchase and rule-making about taxes for trades in that new currency.

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