Why the government can cancel pandemic debt
Ananish Chaudhuri's opinion on why government debt cannot be cancelled is so full of incorrect assumptions it's difficult to know where to start.
Professor Chaudhuri appears to be among the diminishing group of economists and economics professors who have not yet got their heads around the new monetary and economic environment that exists in the post Covid-19 world.
The idea that money creation by the central bank can be used to finance government spending without needing repayment was proposed more than 100 years ago and has been campaigned on ever since by Social Credit. Newcomer Modern Monetary Theory has similar, but not the same, ideas.
Professor Chaudhuri claims, but without substantiation, that government debt being cancelled is a flawed idea based on economic misconceptions, but he apparently has not read history.
The first Labour government under Michael Joseph Savage used Reserve Bank credit to fund the building of 33,000 state houses during its 14 year term of office. Walter Nash, Minister of Finance in that government, had this to say in an impassioned speech to Parliament introducing the legislation that nationalised the Bank.
“The next point in connection with the powers of the bank is the right to buy and sell Government securities. It means that the bank has the right to take up, from the Government, securities to enable the Government to carry out its policy in connection with development works”.
“The amount the Government should get from the Reserve Bank will be limited only by two things. If we find unused labour and unused raw material, and alongside those two factors there are lacking things necessary for the well-being of the people of the Dominion, then it is our work to see that the necessary stimulus of credit is given to the labour and the materials to enable the asset to be produced, and the asset, when produced, is the security given against the loan made by the Reserve Bank to the Government”.
No need back then to borrow from private sector investors or to pay the money back to the bank the government was soon to own.
And as economist Keith Rankin has recently pointed out “If it was 1960 …..the government would have simply drawn on its technically unlimited (but not practically unlimited) overdraft facility at its bank, the Reserve Bank.
“This would be 'new money' – not gold bars from the Reserve Bank's vaults.
“Because the owners of the Reserve Bank are the same people as the 'owners' of a democratic government, the new money is owed by the people to the people.
Again, no need then either to borrow from private sector investors or to pay the money back to the government owned bank. That only came about thanks to Roger Douglas’ unleashing of neo-liberal economics on the country in 1985.
It's only since then that concept of the Reserve Bank being seen as an independent entity has been established. It is an artificial arm's length Chinese wall which needs to be removed, despite Professor Chaudhuri unsupported assertion that doing so would be problematic.
The commercial banks creating digital money to lend to the Government (which is what they do every time they issue a loan to companies or individuals) is only different in just one significant respect from the Reserve Bank creating digital money and depositing it directly into the Treasury's account.
The Reserve Bank can create money without interest or the need for any repayment where-as the commercial banks’ creation of it requires taxpayers’ money to be siphoned off from hospitals, schools, infrastructure, and housing, to pay interest and loan repayments back to the wealthy shareholders of those commercial banks.
The Quantitative Easing process the Reserve Bank is currently using to create $100 billion dollars to buy government IOU’s (bonds) off banks and rich investors comes at a premium that’s going to cost $11.1 billion over the next three years.
That’s $11.1 billion taken from hospitals, schools, infrastructure, and housing on top of the $3 to $4 billion annually paid in interest on the government’s borrowing from those same entities.
Over $20 billion in just three years – enough to fund the building of an undersea tunnel between Wellington and Picton, or 4000 new Wellington Children’s hospitals.
Taxes are surely not levied on companies and wage earners so that profits can be assured for a few rich investors.
Professor Chaudhuri raises that old bogey about Reserve Bank created money being left in the economy and therefore creating inflation, yet doesn’t raise that as an issue over the commercial banks’ creation of it – on average $20 billion in additional money every year ($32 billion last year) - for lending to companies or individuals.
Right now, the Reserve Bank is trying to get the banks to create and lend more, because the real fear is deflation, not inflation.
That’s why, as Keith Rankin so wisely observes, “What would be very harmful would be if the government tried to 'pay the money back' after it had been spent. That would represent the wanton destruction of money that was supporting – circulating through – the wider economy”.
Of course, the Reserve Bank could simply hold on its balance sheet for ever, the bonds it has recently purchased, as the Bank of Japan is doing.
That way both Professor Chaudhuri and Keith Rankin would be happy, and so would today’s and tomorrow’s taxpayers.