This opinion piece is in response to this article.
The giant money merry-go-round
I suppose I should thank Richard Prebble for promoting Social Credit - except that none of the claims he makes about Social Credit policy or its economic views are actually correct.
We should probably not be surprised at that, given you will recall, that Mr Prebble was the former Labour Minister for State-Owned Enterprises who in 1984 toured the country promising to save rail and then, when in government, introduced the legislation in 1990 that turned it into NZ Railways Ltd, ready for sale (as were a host of other state assets built by generations of Kiwis).
About the only correct claim he made about Social Credit is that one aspect of its policy is to make use of the Reserve Bank capacity to create credit and supply it to the government at zero interest. His former party, Labour, used the Reserve Bank to fund the building of 30,000 state houses when it first came to power in the 1930s.
Since this time last year the Reserve Bank has again been creating credit, something that many economists, commentators, and our political opposition had always claimed was ‘funny money’ and neither possible nor credible.
An article in the Sunday Star-Times in June 2020 did correctly quote me as saying that Social Credit had been vindicated in that regard, however the article then went on to say this “But that is served with an uncompromising monetary policy that sees QE (Quantitative Easing) as a cop-out.”
“Social Credit demands the Government (through the Reserve Bank) directly creates the “credit” to fund public spending, rather than living off the left-overs of the free market by continuing the conventional international practice of entirely funding its spending through taxation [and borrowing from the private sector].”
“One of Leitch's concerns with QE is that banks might cream a huge profit through the “merry-go-round” of selling Government bonds to the Reserve Bank and then buying bonds from Treasury when it issues them to pay for the Government's $50b Covid-19 fiscal programme”.
“Why not fund the spending direct, with a giant zero-interest loan from the Crown's balance sheet to itself, it asks?”
I was right. Banks are creaming a huge profit through the “merry-go-round” of selling Government bonds to the Reserve Bank. Over the term of the Bank’s current QE round that profit will amount to roughly $11 billion – money that could have gone instead direct to the government to spend on hospital emergency departments or helping alleviate poverty.
Meanwhile the government continues to borrow from those private banks –building a mountain of debt for future taxpayers to pay interest on and eventually have to repay - further money wasted that could have gone instead direct to the government to spend on hospitals, state housing or infrastructure.
Wasted because the government could have got that funding from the bank it owns – the Reserve Bank – at zero interest and without the requirement to repay it. No debt or interest burden for taxpayers.
Despite what Mr Prebble endeavours to suggest, Social Credit has never advocated unrestricted ‘money printing’ by the Reserve Bank.
On the contrary. A key part of its policy is setting up a New Zealand Credit Authority with independence similar to the Judiciary, accountable to Parliament as a whole. Its task would be to assess the economy, measure its unused capacity and labour capability, and determine how much new money the Reserve Bank could safely create without generating inflation – matching money creation with goods and services.
That does not happen however, with the additional credit that the commercial banks create – approximately $20 billion on average each year. That expansion of the money supply is totally unrestricted, yet Mr Prebble is happy to ignore that fact. It is that unrestricted credit creation, essentially out of thin air, that is driving the speculation in property, shares and other assets, and putting houses beyond the reach of first home buyers.
Both the Government and the Reserve Bank are culpable in facilitating that abomination – the government pandering to a newly acquired asset-speculator voter base, and the Reserve Bank in boosting bank profits through its purchase of bonds off them and its Funding For Lending programme.
Mr Prebble’s suggestion that what is happening now is Social Credit is like owning a petrol/electric hybrid vehicle, but never charging the batteries or running it on the electrics. While it is perfectly capable of being run on battery power, to claim that it’s an EV when that capacity is never used is ingenuous, if not purposely mischievous.
What is ruinous is the current, mostly orthodox, economic management being used.
What could fix it is real Social Credit!