Strange financing

Luke Malpass (The voters’ choice: lives or consequences, May 16) makes a point about massive government borrowing to finance Covid-19 rescue packages needing to be ‘‘paid back’’ at some stage. He also mentions Grant Robertson’s musings about the need to ‘‘have a discussion about tax’’ as part of that process.

Meanwhile, the Government, Treasury and the Reserve Bank (RBNZ) are rapidly putting in place an apparent ‘‘free lunch’’ solution to the debt problem, namely, the RBNZ buying up all the debt the Treasury issues. The RBNZ would finance these purchases by printing money at the stroke of a pen, or a click on a keyboard. So one government agency would own all of the debt issued by another.

And what will happen when the government bonds the RBNZ owns reach maturity date ? Will the RBNZ go to the Treasury and ask for their money back ? No. All that will happen is that the government will instruct the RBNZ to ‘‘cancel’’ the debt. Why would one government agency bother demanding payment from another?

What about the interest the Treasury will be paying to the RBNZ on the bonds the bank owns? Well, the RBNZ has no use for it. It will simply pay the interest over to the government in the form of its usual annual dividend. So the government will be effectively raising money at zero interest and will tell the holder of the debt, the RBNZ, to cancel it on maturity date.

How about the RBNZ lending money to all of us on the same basis ?

Alison June Gilbert, Newtown [abridged]