Discussing the Role of Private Debt is Outside the Scope of the Briefing. Yeah Right

Anything But an Insights Briefing

As I noted in New Zealand’s Adaptation Framework, Te Ara Mokopuna and New Zealand’s Adaptation Framework are nothing more than a ‘one-two punch’ of ideological documents designed to minimise the role of the state in the economy.

In the Adaptation Framework, the recommendation was to invest to protect Crown assets. In Te Ara Mokopuna (which I’ll call the Briefing from now on), the recommendation is to continue to rely on monetary policy as the primary tool for managing the economy.

One slight hiccup with the Treasury’s ‘insight’, however.

The Treasury’s Summary of Submissions mentioned that some submissions had suggested:

that the Briefing was too focused on government debt and should have discussed the role of private debt and the relationship between government and private spending and debt. Detailed discussions of this nature are outside of the scope of the Briefing.

Hang on a second. The main conclusion of the Briefing was that ‘cyclical management should mostly be left to monetary policy run by an independent central bank’ and noted that ‘building the resilience of the private sector to deal with shocks and cycles may lessen the need for, or the cost of, any fiscal response’.

I guess the Treasury failed to recognise that the efficacy of monetary policy is entirely dependent on private debt levels! If there is no demand for private debt because debt levels are already high, then monetary policy loses its effectiveness. Also, if New Zealand is vulnerable to ups and downs because of households having high debts, then detailed discussion on the role of private debt and the relationship between government and private spending and debt should be entirely within the scope of the Briefing!

Don’t just take my word for it – The Treasury brought this up themselves in the ‘short version’ of Te Ara Mokopuna!

They described that:

New Zealand’s economy is vulnerable to ups and downs because of our small size, relying on overseas markets to buy our goods, households having high debts, and high borrowing from overseas.

You can’t make this stuff up.

I guess that basic comprehension and following simple logic is outside the scope of the Briefing too. Better not let them near the health system. Oh wait…

A Short History of Monetary Policy and Private Debt

The so called ‘consensus assignment’ - that monetary policy rules the roost over fiscal policy - is reflective of the current, unintellectual and vacuous state of conventional macroeconomics which has existed in its current form for the past 40 years or so.

The fiscal surplus obsession (shrinking the role of the state in the economy) of successive New Zealand Governments (and New Zealand politics in general) after 1984 required the non-government sector to fill the spending gap.

How did it fill the gap? A massive expansion of private debt.

From the middle of the 1980s to 2008, private debt increased exponentially in Advanced Economies as it become the primary driving force behind economic activity. This period saw near constant economic growth and stability which came to be known as the Great Moderation.

Here’s New Zealand’s total credit to the private non-financial sector (private debt) between 1960 and 2024.¹ Yes – the left-hand axis is percentage of GDP. Also, see the decline after 2021 on the far right of the graph!

And here’s what it looked like during the Great Moderation (specifically from June 1984 to September 2008).²

It is a fair assumption that most of this debt was not used for anything productive. Rather, it was used to inflate asset prices - primarily housing.

Because of the apparent ‘success of economics’ during the Great Moderation, economist Robert Lucas went so far as to announce that ‘macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades’.

So, with that amount of ‘success’, you can probably understand how monetary policy came to be so highly regarded by an exceptionally uncritical audience (i.e., most economists).

That understanding was predicated on a complete misunderstanding of how an economy functions. This is especially true of private debt, where economists still don’t quite understand how bank lending even works!

Poetically (and prophetically), the final line of economist Steve Keen’s 1995 paper ‘Finance and Economic Breakdown’ warns ‘against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm’.

Of course, the Great Moderation was the lull before the storm. Economist Olivier Blanchard wrote that ‘the state of macro is good’ in August 2008 just before the international economic and financial system nearly collapsed in September 2008.

The ‘success’ of monetary policy during this period, and the reason why it’s still so preeminent today, was predicated on a series of historical coincidences, including:

• Low levels of private debt in the early 1980s (roughly 50% in New Zealand)

• An intellectual changing of the guard

• Deregulation

• Shrinking the role of the state in the economy

• Increasing international trade

In the past, I’ve called this the ‘nexus of financialisation’.

Letting Go of the Past

As you can see, there are some holes in the Treasury’s logic that need to be pointed out. If the key takeaway of your Long-Term Insights Briefing is to stick to monetary policy and ‘build resilience in the private sector to cope with shocks and crises’, you need to be called out for refusing to talk about private debt which is a key part of both of these points!

Think of it like this: if 50% public debt to GDP is at the upper limit of what is considered ‘prudent’, then what is 159.5% of private debt to GDP considered to be?

It is clear to anyone with a pulse that the ‘insights’ published by The Treasury are nothing more than an ideological perspective on how to run New Zealand’s economy.

This ideological perspective is behind cutting investment in our health system, infrastructure, education, housing and climate change adaptation. Just let the private sector handle it - that’s worked in the past!

It’s time to leave this ideology behind and focus instead on an economics that is reflective of reality.

Understanding private debt and the relationship between government and private spending and debt (i.e., the sectoral balances) is not outside the scope of the Briefing – it is precisely what’s needed for building resilience in the private sector and understanding the implications of having monetary policy as the primary tool for economic management.

Understanding the economy in this way is essential for enhancing productivity and making an economy that’s more than just a housing market with bits tacked on.³

If the role of the state is to support the economy and the people that make it, then why not work towards implementing an economic policy that does exactly that?

1. This data is from the Bank for International Settlements. The phrase ‘total credit’ refers to the fact that debt is the stock (i.e., total credit) and credit is the flow.

2. That number (0.9697) you see on the graph is called an ‘r-squared’ value. It shows how close the data is to the trend line. In analysis like this, the number ranges from 0 (no fit) to 1 (total fit). In this case, of course, it is an exponential trend line. 0.9697 signals an exceptionally strong exponential increase.

3. Copyright, trademark Bernard Hickey.