It is true - money is "funny". And getting even more weird. NZ is soon to be mostly cheque devoid, and even local-bank-branch devoid - but not quite cashless - yet. And remember notes and coins are backed by nothing but our faith - gold and silver backing is long gone. Notes and coins are mere tokens today. And now, with the new pay-wave options, you only swipe a Visa card or flash your watch to settle a transaction - and not even enter a PIN. And Bitcoin is at its highest value since Elon Musk recently invested about $US2billion.

Quantitative Easing

And now we face interest rates at an all-time low, with virtually no return for retired savers from their term deposits - plus this new but obscure "Quantitative Easing" (QE). The NZ financial world is becoming even less familiar. "Money" is well understood as a centuries-old, very practical, clear-cut means of exchange - but it is much harder to understand and accept that all "new" money, i.e., digital credit, is actually created "out of nothing". And that over 80% of all "new" money is created by the privately owned banks!!

Everyone uses money in some form each day, yet mostly we only vaguely understand the real nature of money. Who precisely owns it - and what is the real value of "owning" debt? It is not just the NZ Reserve Bank that did issue "money out of nothing" in the 1930s. All the privately-owned banks digitally issue "money out of nothing" also - but, with the privately-owned banking system, money is created ONLY in response to someone asking a bank for a specific loan e.g., to buy something for a business or for a property or to get a credit card. Banks can only LEND money in to the economy.

Signs of the great divide between rich and poor in society have long been clear. The already wealthy have lots of collateral against which they can borrow easily, especially at a feeding frenzy time - but society's poorer are regarded as a bank "risk" - as are the new Covid-failing businesses. Banks do not "do" risky loans without sufficient "collateral" to minimise their risk - and so a significant percentage of society are not able to access loans - and especially not for the type of investments such as rental housing that provide wonderful feet-up passive incomes, with no capital gains taxes and all mortgage and renovation costs tax deductible on the way.

The Reserve Bank issues all the notes and coins for our country but is required to keep these cash compo-nents to about 3% of all money in circulation - that is, about 97% of our money is already digital - just an electronic blink. In 1989 the Reserve Bank Act was drafted to define the monetary policy which requires it to manage a stable economy with about 2% annual inflation, using the Official Cash Rate (OCR) as a primary tool to raise or lower general borrowing and spending. When the usual means of raising or lowering interest rates is not sufficient then there is this new "unconventional" Quantitative Easing.

In the 1930s, during the first NZ Labour government under Michael Savage, following the major worldwide economic collapse, with severely protracted social depression, the Reserve Bank issued credit directly to the Government for public benefit. The result of this was remarkable - NZ recovered from the Great Depression ahead of most other countries, and millions was invested in infrastructure, creating jobs, and in housing in particular - and laid the basis of the NZ Welfare State for the benefit of all citizens and which was envied by many in the world.

The possibility of the Reserve Bank to again issue direct credit to the Government is much less "funny" than the licence granted to the privately-owned banks - which also issue money created from nothing - but via a loan, backed by the borrower's real, material "collateral", with interest payments attached, plus the eventual requirement to repay the loan in full - all from personal tax-paid income (or, for the Government to repay its debts from Government income such as taxes). And NO money is "created" via the initial bank loan to cover the interest costs - and this is seen as a cause of continual inflation in our economy.

Why do we accept these terms of borrowing from a bank - but strangely don't when it is the State-owned but independent Reserve Bank creating a similar digital credit, but interest free, and for our nation's benefit - for the public "good"? I have referred to Iceland in a previous Watchdog article with its recovery from failed banks after the 2008 Global Financial Crisis (GFC), using its State-owned bank to support its citizens (see my "Banking And The Role Of The Reserve Bank", in Watchdog 154, August 2020).

Confusion About Role Of Reserve Bank

There is a lot of confusion at present about the role of the Reserve Bank - and its monetary goal to maintain low inflation. Most oddly, until February 2021 when it was instructed to do so by the Government, it did not include house price rises among the listed items to be watched for inflation to be controlled.

• Probably none of us have had to try to understand what it means to have the Official Cash Rate (OCR) at 0.25%, and bank interest rates about 1-2% - and with pressure to go down to 0% interest - or negative rates when we might have to pay to have a bank to hold our deposits.
• And we are trying to learn what these new terms Large Scale Asset Purchases (LSAP's) or Quantitative Easing (QE) really mean and how they work. LSAP's or QE (they are the same thing) were first introduced in NZ in March/April 2020 with little public explanation. Mostly we see only that house prices are rocketing up 10-15% in just a few months and that the NZ share market went up about 50% in 2020 - in just one year !!
• Also, there is a lot of gloom globally. The Covid virus is having a dramatic hold on the world with no clear end yet in sight. Plus, there are many other serious social concerns.
• And there is no capital gains tax on investments like houses for rental income in NZ - which again benefits the already wealthy and not the struggling poor!!

With the OCR reduced to 0.25%, the Reserve Bank launched LSAP's, or QE, for monetary policy purposes, in response to the Covid pandemic. It had become clear that a significant fiscal response was warranted given that the OCR was at an all-time low. What is Quantitative Easing? "It is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective (i.e., using interest rate rises or drops to manage inflation)".

"QE increases the excess reserves of the private banks, and raises the prices of the financial assets bought - which lowers their yield. A Reserve Bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. Buying these securities, bonds etc., adds new money to the economy and also serves to lower interest rates by bidding up fixed-income securities and expands the reserve bank balance sheet" - according to Investopedia, from the Internet.

Initially an $NZ30 billion programme was launched with only NZ Government Bonds but another $NZ3 billion of Local Government Funding Agency (LGFA) bonds was added in early April 2020 - and another extension in May to $NZ60 billion. At the same time, the Treasury was issuing bonds for fiscal policy purposes to the primary market dealers, which are banks or financial institutions approved by the Reserve Bank.

There are eight of these dealers who buy these Treasury NZ Government or Local Government Funding Agency bonds and "cut" them up into smaller blocks to on-sell to the secondary market banks and financial institutions and then these are what the Reserve Bank buys. The current list of approved Registered Tender Counterparties with primary market access to NZ Government Securities are:

• ANZ Bank - NZ branch of ANZ Australia
• Bank of New Zealand - owned by NAB Australia
• Commonwealth Bank of Australia - which owns ASB in NZ
• Deutsche Bank AG, Sydney
• JP Morgan Securities, Australia Ltd
• The Toronto-Dominion Bank, London
• UBS AG, Australia
• Westpac, NZ branch of Westpac Australia

This list is from:

Who Owns These Institutions?

We know Hong Kong Shanghai Bank nominees hold about a quarter of the total shares of the four Australian-domiciled banks but who are the actual people who have such a power over our democracy? How are these institutions selected and under what terms? These primary market dealers then on-sell smaller parcels to some 26 registered banks and financial institutions, which the Reserve Bank has then been buying, with digital money, to increase the liquidity in these sectors for increased lending to the community. A bit convoluted - I think so. But this is the Reserve Bank's approach to "ensure banks can access enough cash to keep lending at low interest rates".

The four Australian based banks have been dominant recipients but what about Kiwibank and TSB and other locally based banks in NZ? ANZ then BNZ are the two outstanding holders of capital and are the biggest mortgage lenders this last year. But the outcome of this LSAP/QE is apparent. It is actively splitting the "growing divide" even wider. The banks are loaded with money from selling these bonds to the Reserve Bank - which created the money to pay for them.

The wealthier Kiwi citizens can compete strongly for this cheap low interest money and what better than to buy solid housing stock for both long-term rent and capital gain. So, we have an increased demand for houses, with rampant increases in house prices everywhere (and no obvious database built up to give much detail about who the major players in this bonanza actually are).

It's all a good grab for passive income, and good long term capital gains without tax, plus any interest payments for the loan of purchase capital as well as any property improvements all tax deductible along the way as well. It is good being rich in NZ. But this isn't stimulating the "real" economy with the need to keep businesses strong and able to employ people. And rental costs have just got higher.

"Reserve Bank figures show 45% of the $9.6b of new lending into the housing market in the month of December 2020 was to landlords, while just $1.7b went to first home buyers. Demand for mortgages is so strong that ANZ has stopped taking online applications and BNZ will only deal with existing customers. The Loan to Value Ratio (LTVR) restrictions can't come soon enough" (The Kaka, 22/2/21, Bernard Hickey).

These house price rises are caused by much more than the demand from returning Kiwis - this QE has enabled the banks to become flush with money - up some $24 billion from a year ago - and they can only circulate that money via loans. So, it is now relatively easy for some to get loans to buy lots of houses - with newer, higher rents for the already poor. Impossible actually after nights cleaning offices to keep out of poverty when the only rental properties are in the $450-$550 vicinity per week.

There's A Lot Of Grabbing Going On

One property specialist company is wanting $17.5million fast - so is encouraging investors from Hong Kong and Singapore - yet residential housing can now only be bought by NZ residents - and I understand by Australian and Singapore investors also - so does this mean that ill-defined "company" structures may enable any overseas persons to invest in NZ housing stock? Lots of groups are advertising for people to jump in at any level on this housing bonanza.

In particular this new LSAP/QE money being brought into circulation is barely going to the productive eco-nomic sectors. Rental income is largely passive income and to own a large housing portfolio is already the privilege of the already wealthy. To buy a first home is becoming rapidly distant for too many people in NZ. No egalitarian basis exists here.

But Bernard Hickey in The Kaka (ibid.) claims that "the current more cautious approach risks entrenching inequality, low productivity, low wages and an over-leveraged housing sector". And: "The longer that interest rates stay low, the higher the risk of euthanising the real economy and entrenching a low-growth, low wage and low productivity economy where the obvious investment is a low-risk one in existing rental property, rather than a higher risk and higher return one in a real business that employs extra people".

QE, both the name and the procedure, first appeared in Japan when it started printing money to get out of a period of deflation following its asset bubble collapse in the 1990s. Since then, it has been adopted by other countries, e.g., the UK in 2009 after the Global Financial Crisis (GFC), where the central banks hoped to stimulate economic growth by empowering the banks to lend more freely.

The GFC was undermining the economy, unemployment was rising and stock markets were in free fall. The UK has continued this QE practice with Brexit and the Covid crises, despite evidence of failure to inject eco-nomic stimulus in to the wider economy. But studies of QE in the UK demonstrate the imbalance in this policy as less than 8% "trickles" down to the "real" economy.

QE is far from perfect as a practice. QE may cause higher inflation than desired if the amount of "easing" required is over-estimated and too much money is created by the purchase of liquid assets - or QE can fail to spur demand if private banks remain reluctant to lend money to businesses and households. Probably worst of all, QE can have devastating consequences for extending the "Big Divide" - for example, in the USA the top 5% own up to 60% of the country's individually held financial assets - especially stocks and bonds.

In NZ it is clear that recent house price and stock market rises indicate QE further increases the wealth of the already wealthy and again the wish for a fairer egalitarianism vanishes. Apparently, many people just have an exponential capacity for sheer greed. And there are cases appearing in NZ now where a company is weakened by the Covid restrictions and another similar company buys it - to have it disappear and so reduce competition, or to absorb it into the purchasing company's fold to expand market share.

Finally, in February 2021 the Government started to try to clamp down on the property speculators to address the housing crisis. At last Loan-to-Value Ratio (LTVR) restrictions will be tightened requiring higher base deposits of capital by the borrower in an attempt to lessen the flow of money to property investors. This should:

• restrict banks' lending to those with little collateral i.e., from over-keen investors - ironically LTVR re-strictions were lifted in April 2020 to limit stifling the housing market but now needs urgent correction - with the new risk of a sharp drop in the housing market. The suggested LTVR ratios are 40% for investors and 20% for new home buyers.
• and new legislation is now being introduced to give the "renters" more legal basis to continue living in their rental property longer term, without random cancelling of their lease by the home owner
• and rental property to meet defined standards - warmth, dryness, better insulation etc.

Neo-Liberalism Has Much To Answer For

NZ has been enduring a great deal of bad planning, in my view, but this high reliance on offshore private banking could become our greatest calamity. I remember the past and how NZ was so different to how it is now run. Egalitarianism was a goal - unobtainable but a respected aim of Government. We had good schools, hospitals, roads water supplies and good social standards. We were world leaders.

Nothing is completely perfect but then was better than now. Lower standards and chaos have resulted from privatisation, deregulation, neo-liberal, and "market"-driven policies plus the virtual autonomy granted to local governments, school boards of trustees, district health boards, etc. along with the under-funding from central Government. Plus, there is a lot of environmental damage caused by massive offshore investments:

• e.g., one 10th of NZ is now covered in pine plantations, with a high percentage foreign-owned, and no responsibility by owners to manage wilding pines or storm run-off carrying hill-side "slash" and logs down rivers and dumping them along beaches etc. and the hillside sediment runoff degrading large areas of coastal bays and ocean;
• Then there is the vast area of intensive dairy farming with damage to freshwater streams, rivers and even drinking water. Nature cannot process the highly unnatural concentration of this animal runoff, along with all the nitrogen, and importation of tons of palm oil plant material for feed. Many dairy farms are also foreign-owned;
• and the Rio Tinto toxic sludge features frequently in the media at present (see Murray Horton's lead article on Rio Tinto's Bluff smelter in this issue, with a section on its toxic waste. Ed.).

So, not only our coastal seas but our freshwater rivers and lakes are becoming highly polluted. In most Asian countries, foreigners are not able to buy the land - and some limits on business opportunities to buy - mostly it's just the labour forces that are accessible. Why have we been so stupid? One big dairy corporation has the rights to take more water from the Waikato River than the whole of Auckland city gets. Madness.

Not only is the fundamental structure of NZ imbalanced, but also recent statements made about the lower standards of teaching in our schools - in maths and reading, science - all not up to the standards that have been achieved, public hospitals with grossly inadequate budgets having to cut some pretty essential services, all roading and other infrastructure delegated to regional and city councils who can't raise enough funding, gross conditions for some prisoners in rotten buildings with little care shown for their futures - everywhere news is sad. Plus, chemical drug addiction is on the rise.

On top of NZ showing too many signs of inadequacy in education, and health provision, there are hundreds in Christchurch still waiting for settlement with EQC and their insurers ten and a half years after the first earthquake - a total national disgrace. NZ is failing. There are many of these worrying problems but our most significant concern should be the lack of adequate understanding about the best way to manage money at Government level. And one of the main outcomes of inadequate planning and delivery is the shortage of money.

As I wrote in my August 2020 Watchdog article (cited above), Abraham Lincoln understood money and the role of Government. This is a similar statement by him: "The Government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greater creative opportunity".

"The financing of all public enterprise, and the conduct of the Treasury will become matters of practical ad-ministration. Money will cease to be the master and will then become servant of humanity". Today it is the privately-owned banks which own and control the Federal Reserve Banking system in the States and therefore has some controls to override significant aspects of US government management.

But always there are good things. I have learnt recently of a group in NZ that is a branch of the original organisation in the UK that believes we need major financial reform - including that the NZ Reserve Bank can exercise the role to issue credit directly to the Government. This group is called Positive Money and can be contacted at positivemoney@org.nz. And I thank them for editing support.

China Leads World With State-Owned Banks

A financial reform movement to be successful must be global and requires a high level of understanding and commitment - especially as the big banking fraternity will oppose it strongly. We know what happened to Abraham Lincoln. We need to reclaim our heritage and have our Reserve Bank work for us all. We have much to learn from China.

The Chinese Communist Party (CCP) understands money and how to make it available for the wider public good. In barely 50 years they have changed a dominantly peasant economy to one with a large, well-educated middle class. Their cities are dramatic, they lead the world with the top six solar electricity advancements, they are industry leaders, pre-school children are introduced to foreign languages - and learn to sing. The Chinese Communist Party is indeed authoritarian, totalitarian, and is blighted by the terrible suppression of many citizens - but remember, the colonial West and the American Central Intelligence Agency have horrible histories too.

But China leads the world with its State-owned banks - the top four of them are close to being the top four in the world - in barely 50 years of active development. Unlike NZ, which sold its perfectly good Ministry of Works and Railways etc. to offshore owners, the CCP has kept most/all of Mao Zedong's State-owned monopolies - the port authorities, roading companies, construction companies etc.

These can be funded without interest as they all are State-owned and the Chinese understand the nature of money. The transformation in China in merely 50 years is testament to the powerful use of their monetary policies. Unless we improve our financial situation, we will continue the decline that seems to be appearing on many fronts in our society now - divided, unfair and becoming weaker and more indebted.