Reserve Bank bond sales the ultimate in madness

01 March 2022

Having gone halfway to economic madness with its purchase of $53 billion in government bonds (IOUs for government borrowing) from the country’s commercial banks and financial institutions through its Large Scale Asset Purchase programme, the Reserve Bank has now gone the whole hog and decided to sell those bonds to the New Zealand Debt Management Office, a branch of the Treasury which manages the government’s borrowing, which sold those bonds to the commercial banks and financial institutions in the first place.

So the government is going to borrow from other banks and financial institutions so that it can purchase its own debt (bonds/IOUs) from its own bank (Reserve Bank) and pay a higher interest rate than what it’s paying to its own bank now.

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

The borrowing was effectively costing taxpayers zero.

That won’t be the case when the government borrows from the commercial banks to buy the bonds the Reserve Bank is selling back to the DMO.

The new borrowing will cost taxpayers plenty.

And the cost will be substantially greater over time as more official cash rate rises, like the one just announced, are implemented.

Tax will be going to the banks in interest payments, adding to the enormous and record profits they’re already making.

If you tried to devise a more ridiculous scenario you would be hard pressed to come up with one. It’s the ultimate in stupidity.

The Reserve Bank could have kept those bonds until they matured with government paying the interest which it got back through Bank profits.

When those bonds matured (loans were due for repayment) the Bank could simply have written them off.

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

It was created on its computers – digital fairy dust – with government backing.

That money creation was confirmed by Reserve Bank Deputy Governor Christian Hawkesby, who, when asked on TVNZ’s Seven Sharp programme on April 30th 2020 where the bank was getting the money the buy government bonds, said “We’re creating 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 the NZ Herald on August 14th 2020.  "We create money … which is what central banks do, and have always done, but we then exchange it for assets [government bonds] and those sit on our balance sheet."

Selling the bonds/IOU’s back to the DMO (effectively government repayment of the loans) may be a cute book-keeping exercise, but that’s about all.

Entries on both sides of the Reserve Bank’s balance sheet (assets and liabilities) will go down, which is what would have happened had the bonds simply been cancelled – remembering that the digital money to purchase them was created from nothing in the first place.

But the new government borrowing, required to buy bonds the Reserve Bank wants the DMO to buy from it, will need to be paid back - even though the commercial banks create the money, in the same way the Reserve Bank does, that they purchase bonds with - and that will place an even larger burden on tax revenue.

The tragedy is that this nonsensical madness will be taking money out of taxpayers' pockets and transferring it directly into the pockets of the shareholders of the commercial banks, large institutional investors, and overseas pension funds.

Those entities should instead be investing in the country’s productive businesses, building economic activity, resilience, innovation, and exports.

Instead the government and the Reserve Bank are helping them to pick the pockets of taxpayers.

The effect of this stupidity for New Zealanders is less tax money left for government spending on hospitals, schools, poverty reduction, housing the homeless, and infrastructure such as roads, rail, water supply, and wastewater treatment.

The funding required for those 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 water and wastewater assets from councils.

The funding for the work required to bring that water infrastructure up to standard, and to cope with an increasing population, will in future be borrowed from private investors - commercial banks, large institutional investors, and overseas pension funds, placing an additional burden on taxpayers (who are all water users) who, through water charges, will be providing a gold plated, 100% secured, long-term profit for the world's wealthy. 

Taxpayers will be paying twice, and getting less, all because the top priority is ensuring the bond market (the gambling casino for the rich) has plenty of ‘investment’ opportunities.

The ultimate in madness indeed, when the Reserve Bank could have provided its created fairy dust direct to the government at no cost to taxpayers, for it to spend on services for kiwis.