Government Borrowing, Debt, and Misconceptions about ‘Social Credit’

K R Bolton

With the looming election and massive Government borrowing due to the impact of Covid-19 on the economy, the notion has arisen that the borrowing scheme is akin to Social Credit. It is assumed there is a relationship because the Government is injecting billions into the economy. From being a party that attracted 21% of the vote in 1981, SC has been reduced over the past few decades to a fringe party, with 804 party votes nationally in 2017. The SC theory is called ‘funny money’, and attracts mirth for the notion that a nation can have control over the issue of its own credit and currency: how absurd!

Hence when the Labour Government’s massive borrowing programme is compared with SC, it is meant in a disparaging manner, and spectres loom of the flooding of New Zealand with worthless paper money, Zimbabwe style. A few years ago when then Green Party leader Russell Norman suggested Quantitative Easing (QE), he was promptly laughed into silence within a day. The Greens have said nothing since, but can only regurgitate orthodox socialist banality.

So what is the Labour Government’s borrowing programme, and is it similar to SC? The seeming similarity is that it is using QE by injecting money into the economy to bring down interests rates and make up for a shortfall in the quantity of money in circulation. The crucial difference is that this QE is still based on state borrowing by repurchasing its own bonds, rather than injecting money directly into the economy. SC party leader Chris Leitch commented:

Up until now there has been no acceptance that the Reserve Bank could operate a QE programme. There is a famous clip of John Key saying “if we could print money then why don’t we just print lots of it and give everybody as much money as we like – it’s ridiculous”.’ [Leitch continued] ‘John Key’s assertion has been proved to be ridiculous because we now know it can be done, and the Reserve Bank has done it to the extent of $60b.

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? [1]

These questions are not being answered. Rather the outcome is more confusion as to what SC advocates, the assumption being that SC stands for high debt levels through state spending , rather than, on the contrary, no debt.

As for how the Government is enacting its QE a cogent description was published by Radio NZ in response to questions put to Acting Director of Treasury’s ‘Capital Markets’, Debt Management division, Kim Martin. Asked how the borrowing programme works, Martin states that Government bonds are issued, which are like an IOU between Government and bank investors, of which there are eight.

Some years the task is much greater as it will be in the year ahead sometimes it’s smaller but we always have an active programme and so most of this borrowing is done through issuing what’s called New Zealand Government Bonds. These are issued in New Zealand dollars and there’s currently around $80 billion of Government bonds that are on issue. [2]

Investors receive their money back after a specified term, while having received twice yearly interest payments. These bonds are ‘onsold’ by the banks to fund managers, insurance companies, central banks of other countries and regular banks. Therefore, the eight banking investors receive the principal plus interest for the bonds they purchased, plus interest on the same bonds they have ‘onsold’. Even at this level it seems like a scam by which the Government that creates the bonds is being fiddled by others –both primary and secondary investors – around the world receiving the profits. Kim Martin continues:

This is like an auction that takes place every week on a Thursday afternoon. It’s a compressed online auction which takes place over 30 minutes. We announce the details well in advance and those who want to participate turn up and bid, but you have to be a registered tender counterparty to take part. So we have eight of these and they’re generally a mix of domestic and offshore banks who are registered to take part. [3]

When the Government has to pay back the interest and principal on its bonds to investors it often does so by issuing more bonds to gain the capital to pay back the debt on the previous bond issue.

If the government at that time is in a position where it’s accumulating money, it’s running what’s called an operating surplus, they can use that money to pay back the bond and it’s ‘cancelled’ you would say. But if it needs to borrow some more money, at the time it matures you would issue another bond of a similar amount to roll over the borrowing. [4]

Therefore, debt accumulates, which is why it increases exponentially by the millisecond throughout the world, by the trillions. [5]

Onselling

The Reserve Bank also borrows through buying back the Government’s own bonds that have been sold to the private financial sector, thereby adding to the public debt. This is called the Reserve Bank’s Large Scale Asset Purchases (LSAPs). The present round was begun in March 2020.

As the Reserve Bank is repurchasing from the market at a time when interest rates are low, it must pay a purchase price that is greater than the book value of the debt.

The initial impact on net debt and subsequent unwind will depend on movements in bond prices and the timing and composition of the LSAP programme. At the time of publication, the Treasury expects recorded net debt to initially increase by an amount equal to approximately 10-20% of the value of government bonds purchased. This impact is expected to fully unwind over the life of the bonds. Approximately half of the impact is expected to unwind by the end of the forecast period, in 2024. [6]

$30b State Buyback

The LSAP programme to deal with the impact of Covid-19 involves buying back $30b in Government bonds. Yes, the Government will buy back its own bonds from the ‘secondary market’. Should you think that this is too crazy to be true, this is what the Reserve Bank states:

The Committee [Monetary Policy Committee] has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low. [7]

That is to say, the Government authority will be bidding to buy its own bonds back on the financial – secondary – market, for which it willpay a hefty sum, which will be repaid by further borrowing. The option is left for this buy-back to be ongoing: ‘The Chair and the external members also discussed the fact that any further monetary stimulus provided by the Bank would likely be through the purchase of government bonds in a Large Scale Asset Programme (LSAP)’. [8]

Additional to the $30b is a $3b buy-back of local government bonds, again from the secondary market. The $33b buy-back is supposed to free up capital for reinvestment elsewhere – including for new issues of Government bonds:

‘Investors selling the RBNZ bonds gives them cash to invest elsewhere, including in buying new New Zealand Government and LGFA bonds issued to pay for the COVID-19 crisis. Treasury’s New Zealand Government Bond issuance is expected to hit a record $25 billion in the year to June. [9]

The buy-back is supposed to stimulate the economy through an injection of capital, by giving investors capital in which to reinvest in New Zealand. Why the Government does not simply issue the capital directly into the economy instead of giving it to other parties by which they further profit is a mystery that is intended to be understood only by the wizards of High Finance. The purpose was explained by Parliamentary political and economics journalist Jenée Tibshraeny:

‘The Reserve Bank (RBNZ) is launching a quantitative easing (QE) programme in an attempt to reduce interest rates and inject money into the economy. This means it will buy Government bonds owned by investors, up to the value of $30 billion, over the next year. $30 billion is equivalent to 10% of Gross Domestic Product (GDP)’. [10]

Further Debt

So far from Treasury’s version of QE redeeming NZ from debt, the current methods multiply public debt while providing a windfall for speculative finance. As Social Credit’s Leitch states:

‘“Nothing has actually changed in terms of what in reality is happening. The Government is still issuing bonds to banks who are selling some of those to private investors. The taxpayer is still lumped with paying the interest and repaying the bonds and by 2024 the Budget predicted government debt would be at $200b, and that means taxpayers will be paying interest on $200b and they will have to find $200b to repay those bonds when they mature,” he rues’. [11]

The Option

QE is the right and logical course. What is not logical is that it is based on the state buying back its own bonds to redirect capital investment by which others profit, while the public reaps only debt. The state will borrow to buy back the bonds on the financial market, hence multiplying the public debt on the basis of creating new debt to pay off prior debt, and so the cycle proceeds – up to a point, until like all Ponzi schemes something cracks and the whole edifice falls.

Debt-free QE as advocated by banking reform means that the state directly spends debt-free money and credit into the economy, without recourse to borrowing from private sources, let alone creating new debts to fund the buy-back of its own original capital so that the private sector can reinvest that capital.

How debt-free QE works was shown by President John Kennedy who in 1963 by-passed the Federal Reserve Bank, and had U.S. Treasury directly spend into the economy $4b of ‘U.S. Notes’, through Executive Order 11110. Lincoln financed the Civil War by issuing $150,000,000 Greenbacks. [12] The First Labour Government issued £5,000,000 of ‘new money’ through the Reserve Bank to fund the iconic state housing programme. Now Labour and all other major parties do not have the foggiest idea how to fund a housing programme or anything else. [13]

Liberation from Debt Bondage

For the Right liberation from the bondage of debt-finance has traditionally been of primary importance. Nothing can proceed without the dethroning of plutocracy. Even an all-white utopia would return to the cycle of decay if the rule of money is not addressed. It is not only a matter of economics but also of morality, culture, and social ethos. Even before Spengler, Brooks Adams wrote of the manner by which a money and merchant-based society diverts and saps the vitality of a culture to the point of decay. [14] And before Karl Marx the great conservative Thomas Carlyle wrote of the decadent impact of capitalism on Britain, the destitution of its former artisan and farming classes, and the moral corruption of its aristocracy. [15]

The social ethos of the Right is pre-capitalist, restoring the organic social community. The Left merely wants to expropriate capitalism, not to transcend it, as Oswald Spengler pointed out a century ago. [16] Until the West, and from whence the world, is liberated from international finance capitalism all other issues are diversions.

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