Post #2516897

The hand-wringing of Nicola Willis, Luxon, and other political commentators about the level of NZ government debt is much more about ideology than economics or reality. NZ government "debt" doesn't work in the way that household or business debt does, by virtue of the fact that NZ issues it's own currency. By convention, NZ issues bonds in relation to the budget deficit (i.e. how much more the government spent than was recovered via tax). Willis, Luxon, et. al. love to tell us that we're living "beyond our means" as a country. Surely then they would advocate running budget surpluses, repaying "debt" by buying back bonds, and stop issuing new bonds? And what would happen if we did that? Firstly, household debt (the bad kind) would explode as families tried to fill the gaps left by withdrawing government services. And secondly, the government would have to keep issuing bonds so that Kiwisaver providers would have a risk-free asset to invest in. The financial markets know that the NZ government bonds are risk-free, because since they are denominated in NZD they are guaranteed to always pay out interest. Exactly this happened in 2002 when the Howard Government in Australia proposed exactly this and the financial markets lost their minds. Basically, without bonds there are no safe-haven, risk free assets for superannuation funds and (though this is obviously much less of a concern), the financial markets are unable to price risker assets if they don't have a risk-free assets to price against. The takeaway is that the NZ government can't go bankrupt, NZD denominated bonds are therefore risk free, and most of what Willis, Luxon and their ilk have to say about the economy and how it works is wrong #nzpol https://www.evatt.org.au/post/bond-traders-take-costello