Money printing isn’ t free

It would be remiss to write about government debt without mentioning the closeness of the Government and Reserve Bank of New Zealand (RBNZ) over the past few years.

While the two operate independently, they enjoyed a symbiotic relationship during 2020 and 2021. Come 2022 and the Government and bank remain joined at the hip — but no longer rowing in the same direction.

As critics of the current amount of government borrowing argue, elevated levels of spending aren’t helping dampen inflation.

But RBNZ’s actions aren’t particularly helpful for the Government either.

In early 2020, the Government and the RBNZ had the same mission — provide an unprecedented amount of stimulus to support the economy.

The bank’s ability to do so by cutting the official cash rate (OCR) was almost exhausted because the rate was already very low. So, it launched its Large-Scale Asset Purchase (LSAP) programme.

This saw it figuratively create money to buy $53 billion of New Zealand Government Bonds (government debt) from banks between March 2020 and July 2021.

The RBNZ’s massive intervention in the bond market was aimed at putting downward pressure on long-term government bond yields, which affect interest rates generally.

The programme enabled the Government to issue an unprecedented amount of debt to pay for the Covid-19 response, as it knew there was a buyer of last resort for all the bonds it was issuing. The arrangement also lowered the Government’s debt servicing costs.

Now that the RBNZ has started lifting the OCR to get on top of inflation, it has just started the process of selling $5b of bonds directly back to the Treasury every year for five years.

The pinch is, the Treasury will need to borrow more than it otherwise would have to get the $25b required to buy the bonds from the RBNZ.

The situation sees the debt that was financed by easy printed money, replaced by debt financed by regular investors in New Zealand and abroad. It replaces the free lunch with a lunch that needs to be paid for.