We at Positive Money New Zealand have reviewed the Finance and Expenditure Committee’s final response to our petition to have the Reserve Bank issue all of our currency. While we are disappointed with the outcome, we wish to thank the Committee for considering our petition and for the time given by some members to hear directly from us. We also make the following comments.
- We are heartened that the Reserve Bank is open to exploring the merits of Central Bank Digital Currency (CBDC) in the future and that they will consult with us. We would encourage the Reserve Bank to explore the merits sooner rather than later as our economy is under significant stress and the Reserve Bank’s currency is now below 2% of our total money supply.
- We acknowledge that a full CBDC has not been tested in any country and so an alternative could be a partial implementation. Partial implementation is happening in Japan and Canada with a good degree of success.
- The comment that, “The Reserve Bank has significant influence over the creation of credit through its monetary policy” is open for debate. If it has had “significant influence”, it has used this to provide too much credit.
For decades, commercial banks in New Zealand have expanded the money supply much faster than was required to support economic growth. In the thirty years from 1989 to 2019, GDP grew by a factor of 4.23. In the same period banks expanded the money supply by a factor of 8.81. Banks expanded the supply of NZD more than twice as much as was needed for economic growth with the majority of the money being channelled into the speculative economy.
- Further, with the OCR at 0.25 percent the option of further interest rate cuts to stimulate the economy is not available without moving to negative interest rates, further penalising savings and inflating asset prices . Providing liquidity to the private banks through Quantitative Easing does not appear to be getting into the job rich areas of the productive economy either.
- The comment that “direct monetary funding carries risks in the long term through inflation or higher interest rates elsewhere in the economy” is also questionable. There has been no such impact in Japan over the past three decades, there was no such impact when the first Labour Government did it in 1936 and the Central Bank of Canada injected billions of dollars for infrastructure projects for 50 years up until 1976 with no adverse effect on inflation or interest rates. We also proposed to use the independent Monetary Policy Committee to mitigate any potential risk.
- We are disappointed that the Reserve Bank dismisses the role that excessive credit is a key driver of housing unaffordability and the social harm it has now caused. In its points 27 and 28 (Improving housing affordability), it states that:
The petition argues that the current monetary system has been a key driver of high house price inflation relative to generalised inflation throughout the economy. This claim is not supported.
It argues that housing supply factors determine house price inflation and refers to a Productivity Commission study in support of that. But the Productivity Commission study(March 2012) supports the view that credit has been a driver, not just by-product, of housing inflation:
With deregulation in the early 1990s improving banks’ access to an under-leveraged household sector and perceptions that mortgage lending is ‘as safe as houses’, the expansion of the banking sector into the home lending market was a natural development. In large part, this explains the ready availability of money for housing, which, in turn, most likely contributed to surges in house prices in the mid-1990s and mid-2000s (p53).
- Below is a graph by Professor Steve Keen that shows the correlation between the availability of household credit and house price changes from 1990 to 2020. Professor Keen told us recently (August 9, 2020) that a correlation at 0.81 meant that “at least 65% of what you see in terms of house price variation can be explained by variations in the level of mortgage debt”.
From the 1990s when the Reserve Bank successfully lobbied to have housing removed from the CPI inflation index on which its performance would be judged, to its advice to the Productivity Commission stressing supply factors, to its response to our petition, there appears to be a history of encouraging policy makers to look elsewhere for the causes of housing inflation.
To sum up, while we are heartened that the Reserve Bank is open to exploring the merits of Central Bank Digital Currency we do not agree with other aspects of the bank’s analysis. We do share the report’s view that New Zealand’s money system should support good economic, social, environmental and business outcomes but we ask that the Committee investigate the negative effects arising from the Reserve Bank’s operations, and ways to address them.
We once again thank the Finance and Expenditure Committee for considering our proposal.