It's not just about the government!

Another issue of the Listener, and yet another article full of supposed truths about government debt  ("Another day older & deeper in debt", Money, June 28). As I've stated before, a government with a free-floating, non-convertible currency is nothing like a household or a business. The New Zealand Government does not have to balance its books. It doesn't have to save for a "rainy day". Ever. End of story. But even if we ignore this fact, by only focusing on the government books, the author of the aforementioned article is ignoring the rest of us out here in non-government land. 

The New Zealand economy can be seen as having three distinct sectors. The first two sectors, the public sector (government) and the domestic private sector (NZ households and firms), make up what is commonly called "New Zealand Inc.". The third sector is the foreign sector (the rest of the world). 

The first thing to realise is that this is a closed system: the combined cash-flows of these sectors must net to zero over any time period. In other words, if any of these sectors run a surplus, then at least one of the other sectors must run a deficit. This is basic accounting.

Currently we - the domestic private sector - spend more NZ dollars than we earn. Consequently, we collectively run a deficit that must be funded by the other two sectors. Now here's the key point: if the government runs a surplus, then the domestic private sector must fund its deficit entirely by borrowing NZ dollars from the foreign sector. This means NZ banks borrow more from off shore, and we borrow more from NZ banks. On the other hand, when the government runs a deficit, we in the domestic private sector don't have to borrow so much from the foreign sector as almost all government spending goes to the domestic private sector, and therefore reduces our borrowing needs.

Simply put, when the public sector (the government) restricts spending, it forces the domestic private sector (that's us) to borrow more from the foreign sector. Any decent analysis of the New Zealand economy should take this into account...

Election year and government spending

Brian Easton sparks up debate on government spending (“Lolly scramble, anyone?”, Listener, June 14) but contains it within – the author would have you believe - certain unquestionable facts.

A government with its own flexible, free floating, non-convertible currency (like the New Zealand government) is not like a family or a business. It simply does not have the hard constraints that households and firms have. Examples of governments with their own sovereign currencies are New Zealand, US, UK, Australia, Canada, and Japan (amongst others). These governments do not need to build reserves for unfortunate events. Have any of these governments had to have reserves in store in order to run large deficits since the GFC? No. Have interest rates in these countries spiked because of the increase in the level of government debt? No, and remember that Japan has been running large deficits for over 20 years and interest rates have hardly moved at all.

Here is the key point: In all of these governments I’ve mentioned, the treasury and central bank co-ordinate activities in such a way as to ensure that there are always buyers of government debt. The New Zealand government can never run out of money (unless that is their intent – think about the US debt ceiling!). The New Zealand government can always afford to purchase goods and services in its own currency.

This is not to say that the government should spend without limit - too much spending in unproductive areas can cause too much inflation. But in the countries I’ve mentioned, the correlation between increasing government debt and subsequent inflation is non-existent. I would argue that we focus far too much on inflation, and not near enough on health, education and tackling unemployment.

Portugal, Ireland, Italy, Greece, and Spain (the so called “PIIGS”) are in a completely different situation because they’ve adopted the Euro currency and no longer have the flexibility they used to have when they had their own sovereign currencies. In fact, in 1992 when Italy still had the Lira, trader Warren Mosler famously convinced the Italian government that they did not have to succumb to the austerity pressured on them by the IMF because of the very fact that they had their own free floating, non-convertible currency. As it turned out, the Italian government said they were fine (because they were), yields dropped on the government debt (as the market had mispriced the risk), and austerity measures were not necessary.

The conclusion is that restricting government spending for the purpose of targeting surplus or a specific level of government debt is, in and of itself, pointless and potentially damaging.