Keeping it all together on bond sales

By Matt Nolan 14/03/2013


Hey all, I’ve been away – and I still am.  I’ll be back next week.  However, I have to write on this.  Over on Rates Blog, Bernard Hickey stated the following:

The most interesting revelation from today’s Monetary Policy Statement was Graeme Wheeler’s comment that he knew other central banks were buying New Zealand government bonds as part of their Reserve buying programmes.

This is how printed money is lifting our currency to over-valued levels.

Ok, now I don’t know what the RBNZ has been saying – I don’t go to their media lock-up.  But lets think through this a bit.

“Bond buying” will push up the currency if there is some sort of financial flow – such as the government increasing borrowing (and it being funded from overseas) or bond holders in NZ selling bonds to overseas buyers.  From what is indicated, it seems like we’ve had a bit of both.  So the government is borrowing to pay for a bunch of stuff, and this is increasing the current account deficit.  We need a corresponding lift in the capital account surplus to pay for it – hence we have this financial inflow.  People are willing to lend to us incredibly cheaply so this is pretty nice of them.

The two complaints I’m hearing are:

  1. It pushes up the dollar:  Investment+consumption > savings, so yes this pushes up the dollar.  The question is why the interest rate and exchange rates that puts us in our current “balance” seem so high relative to other countries.  Is it because our growth prospects are better?  If so this is good.  Is it because of some structural issues in our economy?  If so this could be bad.  Is it because, as the RBNZ seems to believe, there is a bubble in the dollar/bond markets – if so we have people overpaying New Zealander’s to buy bonds that will decline in price … interesting.
  2. Why don’t we print/pay for it domestically:  This is part of the “QE for NZ” crew view, and it is inappropriate.  Keep the ideas together here, what are we trying to “solve” by getting the central bank to buy government bonds?  Are we trying to loosen monetary conditions … if so cut interest rates, as QE is really a form of this.  Are we trying to reduce foriegn lending … if so we need to reduce domestic borrowing, we are a small open economy and so we pay the world interest rate to borrow as much as we want (in a sense).  If monetary conditions are appropriate, then QE will just be inflationary, and it does nothing about the inherent “savings-investment imbalance” that people are concerned about when they discuss people lending to NZers.