For the last couple of decades, public debt and banking system liquidity has been ratcheting up around the world after each recession or market correction. But no one appears to have any credible plan for restoring public debt, liquidity or central bank policy rates to normal levels.
This week, The New Zealand Initiative published a research note called “Doing whatever it takes with someone else’s money” which outlined why New Zealand should be careful of going down the same path.
The problem is international asset prices are now being set on the basis that profits are private while taxpayers should bear the losses. Such an insidious policy rewards borrowers and risk takers at the expense of savers and more prudent investors. It effectively turns saving into a mug’s game.
This unsustainable trend will end on the day US or European central bank promises to do ‘whatever it takes’ are not credible. That day would begin what one specialist commentator called “the biggest wipeout of wealth in history.”
Until Covid-19 came along, Australia and New Zealand had stood against this trend. Their public debt ratios were low and central bank interest rates were well above zero.
Unfortunately, New Zealand is now on the path to higher public debt and unprecedented monetary easing with no credible plan for unwinding the situation before the next crisis.
The superficial justification is that unprecedented times call for unprecedented measures. Actually, the only proper justification for any public policy – unprecedented or not – is whether the benefits to the public are higher than the costs.
For example, why exactly is it good for the public that the Reserve Bank is borrowing tens of billions of dollars to buy government bonds? And precisely why is the RBNZ required to lift low rates of consumer price inflation towards the middle of a 1-3% range when the social cost of low inflation is not obvious? The UK had zero inflation in the late 19th century and the world didn’t stop spinning then.
The report also questions if more weight should be put on the issues of financial efficiency and stability.
All of this creates a constitutional concern. There is a growing notion that the Government should instruct the Reserve Bank to use its ‘ATM’ to fund fiscal deficits. That would end the RBNZ’s independence and compromise the conduct of both monetary policy and fiscal policy.
That would be a terrible outcome of the Covid-19 crisis and it must be resisted.