John Key today (14th April 2015) on Newstalk ZB, talking
about government spending, with my commentary in italics:
"When we live within our means, we are in a situation where
we’re not borrowing internationally to run the government books."
Wrong. The government doesn’t really borrow from anyone. When the
government issues debt, it simply swaps one type of government liability (New
Zealand government bonds) for another (New Zealand dollars). And when the
government does this, the RBNZ (an agent of the government) may perform
liquidity operations that result in the RBNZ
creating New Zealand dollars out of thin air to ensure there is liquidity
in the banking system so that banks and other institutions can “purchase” the bonds.
"We are in a position where, you know, the international
financial markets like that."
Wrong, if by that, John means that the financial markets will demand
higher interest rates from New Zealand’s government bonds. This doesn’t
actually happen at all, as the RBNZ effectively sets interest rates along the
yield curve through the OCR and commentary on future OCR expectations. There is
really no relationship between interest rates and levels of government debt for
countries that have own free-floating,
non-convertible currencies.
"And we’re also in a stronger position for a rainy day if
that comes and, you know, happens again."
Wrong again! The government can - and will always be able to - spend no
matter what the level of outstanding government debt is, regardless of the
prevailing economic climate.
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