The FT has an article this morning that has the headline:
The argument is that New Zealand was the first in the world to task its central bank with meeting a consumer price inflation target. Now it is planning to be the first to task that bank with tackling house price inflation .
I applaud New Zealand for doing so. This is really radical. And there is good reason for that. Succeeding with this aim is going to require some serious rethinking of structuring of New Zealand's financial markets. Others will be forced to follow in due course if they succeed.
The article gives no hint as to the author's thinking on how this issue might be addressed. It simply notes that there is a problem to solve, saying:
Policies need to keep up with changes in the global economy. A rethink is overdue, particularly among Ardern's fellow progressives worldwide. They have come to embrace easy money as a way to finance social programmes, but need to recognise its negative impact on financial stability, wealth inequality and housing affordability.
I have been tackling that issue here. I have argued that changing tax law to ensure that the savings glut created by money creation is redirected towards capital formation is an essential part of achieving this goal. After all, one of the stated goals of the Green New Deal is the delivery of more social housing. I am quite sure that this solution will be adopted in due course.
But the first challenge is the more basic one. It is in securing the understanding that whilst government deficits are essential (and they are) it is also essential that we now realise that the inevitable consequence is this increases private wealth, and that the distribution of that gain is decidedly uneven.
This truth is not accepted. It has not been tackled within modern monetary theory (MMT), for example. And it cannot be dismissed within MMT by saying this is the consequence of quantitative easing, because that is not true. QE might exaggerate the issue, but it is only an asset swap. It is the deficits that create the inequality, and that inequality is growing, rapidly.
New Zealand is right to raise this issue. It is real. But without a willingness to change tax reliefs to force money away from speculation and into productive use as capital (the existence and nature of which is almost forgotten about in our modern, debt driven, economy) then nothing is going to change.
New Zealand needs a savings revolution that re-establishes the link between that activity and investment. Then it can solve its problem. Until it does that I very much doubt it will succeed.
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Good luck to them I say.
I don’t see why you cannot buy your house from the state cheaply at all.
I thought you used to say that QE cancelled bonds. Now you say it is an asset swap, which doesn’t cancel them. Which is it?
And if deficits increase inequality, why will running even larger ones and then printing to the money to pay for them, which is also what you suggest, be any different?
If you swap an asset then the one swapped out is cancelled
How hard is that to understand?
And I have already answered the second one in the piece – so very politely, stop displaying your inability to read
Sorry – that is not right.
An asset swap is exactly what the name implies. One asset is swapped for another. Neither asset ceases to exist. If nothing else that would void basic accounting – cancelling the QE debt would mean that you have an asset (cash) without the associated liability (bonds).
Cancelling the QE bonds would mean that it is not QE. It would just be monetary financing, basically printing money. Which is a very different animal.
You don’t explain anything about my second question either. You say deficits are essential but that they increase inequality. You don’t say anything else about the matter.
I’m assuming your answer is going to be along the lines of deficits create inequality except when they are deficits for the Green New Deal or in general, something you approve of?
Which makes no sense, because if what you say is true, that deficits increase inequality, then the same should be true in all cases – or it is not true that deficits increase inequality. Can only be one or the other. Either way you can’t be right.
Gid this is tedious
The Treasury swaps bonds for money
It ends up owing its own binds
It has never resold one of them
They are cancelled as a consequence
I have explained this endlessly
And yes, deficits increase inequality. So I referred to links showing how to tackle that
Please don’t call again – you are wasting my time
I posted a link to this blog post of yours on the new Scottish Banking & Finance Group FB page this morning, with the following commentary……
“Richard Murphy addresses a key issue for this group in his blog post this morning…..how to get public savings to be used to invest in the things we need – such as social housing, renewable energy, de-carbonising heat systems and transport, food production etc. My own focus on the role of pension funds is because they are vast pools of public savings. Richard advocates tax incentives to get them to change – I think more fundamental reform is required although changing tax rules would be an interim measure to help the process. There is a big discussion to be had about these issues.”
Agreed
Both are necessary
Richard, where does direct monetary financing fit alongside this?
I’m not sure if I have it right, but if the Bank of England increases the government overdraft on the Ways and Means Account, then the government has money to spend directly into the economy without QE or borrowing?
If this money is spent into, for example, increasing the size of the NHS, then isn’t there both a deficit but also a targeted allocation of this money, which could possibly address some inequality?
The result is exactly the same
Government deficits = private gain in wealth
MMT says so. It has just not embraced the consequence as yet
The way I see it is… because of the way economy is currently structured, printed money is having much less impact than it could do. Rampant rent extraction reduces the multiplier effect, as the new money ends up with landlords or off shore more quickly than it should.
Eg, money printed to pay nurses> the extra money gets eaten up in rent arrears/rent increases> money leaves real economy…back to square one, but with added asset inflation.
Graham
First, there is no money offshore. Money is just debt, and the debt in question returns straight to major financial markets
There is tax abuse and false accounting offshore, but no money
You are right on rents
Hence my demand that wealth and income from it be taxed
And that tax incentives be chan ged
How this develops will be interesting. It is a long time ago but I always found the RBNZ smart and refreshingly free of bullshit. They did interesting work on inflation targeting (before it became ubiquitous) and also good stuff on ALM of their debt portfolio…….. and when I asking them to pick a lunch venue (at my expense) we went to a bench up a hill that overlooked the harbour and ate fish and chips out of newspaper.
It is possible that this is merely an attempt to avoid political responsibility for the developing (cost of) housing crisis…. and that would be very disappointing. What really needs to happen is for the RBNZ to go back to government and say “if you really want to tackle this issue then WE need a different set of tools. Also, YOU need to be using the tools that you have in conjunction with our efforts”.
The tools are not new and you have identified them already…. but what is needed is a willingness to use those tools AND a move away from arms length “independence” towards a more collaborative approach between Government and Central Bank. In the long run, this rethinking of “Central Bank Independence” could be significant – it would not be the first time that the RBNZ has led the world.
I entirely agree
The housing market in the UK was often compared to that in Germany. Germans more likely to rent. Germany built more homes. Britons see housing as an investment. German bank lending for housing tighter. UK lending 100% + loans were common and seem to be returning. MIRAS – subsidy to increase house prices, now defunct, but still several Govt schemes designed to increase house prices, including obscene house price inflation in parts of London driven by foreign money which has a knock-on effect elsewhere.
And yet we have a stock of housing that includes some of the worst in Europe. Its another example of “othering”. Poor housing is fine for the plebs.
Start taxing house price inflation on main homes.
Sorry I posted this earlier on the wrong thread, I post it again here for the record.
This reminded me of an old article from a few years back. The NZ central bank has a history of revolutionary thinking ,here is a good example from the 1930s.
“In 1935, the new Labour Finance Minister, Walter Nash, wanted to use the RBNZ to help stimulate aggregate demand, increase employment, and get the economy going again. According to NEF (2013), the primary goal of the RBNZ was to undertake “credit creation for the real economy”.
The central bank was to primarily use its money creating powers in two different ways. Firstly, it would guarantee the prices of agricultural produce, where “shortfalls between market and guaranteed prices met by its (RBNZ) advances”. Secondly, Nash instructed the RBNZ to make £5million of loans available for the construction of social housing — aimed at providing low cost homes to poorer households.
NEF (2013) further suggests that the RBNZ also created credit to help finance a number of other public work projects. From 1936-1939, the RBNZ created roughly NZ £30 million (equivalent to around 5-7% of New Zealand’s GDP). According to NEF (2012) over this 4-year time frame, real GDP grew by 30%.”
https://positivemoney.org/2016/04/canada-nz-a-history-of-qe-for-people-part-8/
Reply
Good luck to NZ on this, considering they currently have rampant house price inflation, 18.1% in the last year, they will need it. Given that many of the things that we have to buy or pay for, what we need like a roof over our heads are largely ignored for calculating official inflation, I for one simply see “official inflation” rates as a farce. When I see that it is around zero I just laugh. The official inflation indices are full of things we don’t need to have and downplay the things we do need just to live. What I would like to see is a new inflation “need” index which measures all the things we need proportional to the average salary. I suspect it would shock many people, so it will never happen. I doubt the Tories will ever include a true measurement of HPI given how much their economy and voter base is dependent upon asset price inflation.
We have what Bob Cobnutt in the Property Lobby calls a ‘Property Financial Complex’ which needs to be controlled, certainly giving The Bank of England a target to both end House Price Growth and return prices to their historic price to earnings ratio would be a good start.
I might also suggest that either the BoE and/or The Competition and Markets Authority should be looking at prices which are rising faster than inflation – funerals are currently being looked at and energy looks like another.
The property market has been a human pigs trough for far too long.
Having recently returned to Scotland after living in NZ for 30+ years, I am sick of seeing NZ held up as some sort of Utopian land flowing with the proverbial.
NZ is a wee country controlled by the petite bourgeoisie and right wing farmers. Colonial attitudes are still the basis of much of the collective thinking and jingoism is the order of the day. Over 250,000 children live below the poverty line, NZ has the highest rate of teenage suicide in the world, and the housing crisis is beyond desperate. People living in cars and shacks without power or other services. Severe lack of social housing and much of the existing stock is rundown and getting worse.
Yet because owning a ‘portfolio’ of rental properties is the national obsession it is a rentier society driven by neo-liberalism. No CGT! A PM who campaigned on the introduction of a CGT and when elected declared there would be no CGT while she remained PM. Her exact words!
They do have a very good Tourism Marketing Board, evidenced by the amount of bullshit propaganda the rest of the world has swallowed. Check out these two links from yesterday’s NZ online news and then tell me what a great NZ Govt response there is to the housing crisis.
https://tinyurl.com/yvuw4j5x
https://tinyurl.com/32tpvknp