Finance Minister engages with Positive Money NZ on Direct Monetary Financing

Good morning Scott,

My name is Don Richards and I am the national spokesperson for Positive Money NZ, an independent, non-profit group advocating for monetary reform in New Zealand. Our patron is Bryan Gould, and we are campaigning to change the way money is created so that money serves society and not the other way around.

Our Reserve Bank created $55 billion dollars during 2021 and 2022 and provided it to financial institutions to assist with their liquidity and to lower interest rates.  This had the unfortunate consequence of pushing up the cost of housing.

A better use of Reserve Bank money is to finance infrastructure projects such as schools, hospitals and roading.  This will free up tax dollars for social services and use of Reserve Bank money in this fashion is called “Direct Monetary Financing”.  Raf Manji, economist, former London banker and former colleague of Sir John Key is on record as saying “For an infrastructure project that needs say a billion dollars, the Government can actually issue that directly into circulation.  There is no interest charge.  If the bank issues that into circulation, it comes with interest”.

The Reserve Bank has provided Direct Monetary Financing in the past.  In the 1930s the first Labour Government was under enormous pressure to provide jobs and lift the standard of living for ordinary kiwis, as the world was in the grip of the Great Depression.  The Government, under Michael Joseph Savage, did that by having the Reserve Bank inject low-interest money into the economy for infrastructure projects and housing

This enabled New Zealand to emerge from the Great Depression earlier and in better shape than most economies and set the platform for the Welfare State. .  This type of spending in one form or the other continued through until the 1980’s. The Canadian Central Bank also provided money for infrastructure projects for 40 years (from 1935 to 1975) to build roads, hospitals and schools with no impact on inflation and China is currently using Direct Monetary Finance throughout its economy

There is no need for cuts to essential services to get by, rather we can have a world class health service and welfare system that works for all, just by having our Reserve Bank fund our infrastructure.

I am happy for you to contact me and to answer any questions you may have.

Nga mihi

Don Richards

Dear Nicola,

An alternative funding model for infrastructure

Thank you for your reply to our earlier email.  If we may, we would like to suggest how we can remove the barriers/concerns to help get what everyone wants: more infrastructure built.

The risks you raise are valid, but done properly Direct Monetary Financing (DMF) will not cause inflation, nor undermine RBNZ independence.

Inflation

All spending carries inflationary risk, regardless of the source of the money. What is most important is that the infrastructure sector has the capacity (labour, materials, etc) to build what is needed, and the funding provided does not exceed this capacity.  Fortunately, the rate of issuance of funds is easy to control.

If DMF were responsibly implemented, and inflation still raised its head (unlikely), the government and RBNZ have tools to deal with the problem. If there was too much money in the economy, the Reserve Bank could slow the issuance of infrastructure funds to deal with regional bottlenecks, or adjust interest rates; or Treasury could issue infrastructure bonds to the public or increase taxes. If supplier pricing power or capacity bottlenecks were inflation drivers, the Government could encourage competition or take steps to address workforce shortages.

Reserve Bank independence

Reserve Bank independence and credibility could be maintained with good institutional design.  We propose that the Infrastructure Commission (or an entity like it) recommends a group of projects that Parliament ultimately approves.   The Reserve Bank is explicitly a funder only with no power to choose projects.  Please refer to the following link for one such arrangement, our proposal for Local Water Financing Done Well.  This design, plus the long-term nature of infrastructure anyway, would prevent any concern relating to short-term focus by the Reserve Bank.

DMF comparison to LSAP

We agree DMF has some similarities with LSAP, but importantly some key differences too.  A much smaller amount if DMF is required to achieve the same growth in the real economy, because DMF enters the economy directly via government spending, rather than indirectly through the financial sector like LSAP.

DMF is not just an emergency tool for when the economy is weak.   Treasury compared DMF and LSAP in its Aide Memoir (attached), but only in the context of the Covid crisis.   DMF is actually a powerful tool which can be used effectively in normal times.  A good homegrown example of the successful use of DMF is funding state houses and development finance for agriculture and industry from 1936. There was real GDP growth of 30 percent over four years with well-managed inflation.

Note that DMF does not have to produce a permanent increase in the monetary base.  In our Local Water Financing Done Well proposal mentioned above, the principle is repaid.

We would also like to clarify that PMNZ does not advocate using DMF to replace all government bond issues. Both should coexist since they each have advantages for both monetary and fiscal management.

Petition

We are interested in gaining cross party support for DMF and you may wish to know that we will be lodging a parliamentary petition calling for an inquiry into the Reserve Bank providing financing towards significant infrastructure projects at zero, or near-to-zero interest rates. The low interest rate is a key advantage between DMF and borrowing from traditional sources to fund infrastructure as a standard 30-year loan at 5 per cent would double the cost of the project through interest charges.

We appreciate you taking the time to read this email and urge you to consider the use of Direct Monetary Financing as an option to resolve the decades of underinvestment in infrastructure. As you are all too aware, every year of underinvestment worsens infrastructure bottlenecks and raises long-term costs. That’s the real deficit we should avoid passing on to our children.

Yours sincerely

Don Richards