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Andrew Riddell's avatar

Where should I look in the Reserve Bank Act 1989 to find RBNZ banned from direct Treasury finance?

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Trevor Best's avatar

As I understand it, in a sovereign state where the State has the monopoly on the issuance of its own currency, money is "made" by the State spending it into existence. The NZ government also licences Banks to create money through lending on mortgages. To maintain that license the Banks have to maintain a level of private deposits to protect against the borrowers failure to re-pay but that is a relatively small proportion of the total debt (I think it stands about 14% at the moment). With a monopoly (as the NZ State has) money is literally created as a line of credit in the governments accounts. The national debt is the difference between what has been issued and what has been taken back through taxation. The limiting factor on the growth of the money supply is inflation: too much money for too few goods and services means prices rise. The fear of inflationary pressure by over-supply of money led to the Labour government re-instating independent control of the supply although I suspect private banks might have had a hand in that because they have been the primary beneficiaries. It was also a gross misinterpretation of the causes of inflation in the 1970's. While supply chains were constrained by import controls the primary cause of inflation was the oil price shocks. 400% increase in oil prices will lead to inflation that, like the COVID supply chain problems, monetary policy can't fix. Whatever the driver of inflation and recession, the fiscal strait jacket we currently operate with is by choice and we need to make a different choice. However, that is so politically difficult that neither major party will make it.

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