Summer 2021

Millennials are afraid. They’re reluctant to take out a credit card and can’t imagine owing more than five times their income on a house.

It’s understandable. Our government has borrowed almost a billion dollars a week since the first lockdown for wage subsidies and benefits.

It’s sparking debate about a NZ$200 billion ‘Debt Monster’ being created for future generations to repay.

The Government’s forecast to borrow the equivalent of NZ$40,000 for every man, woman, and child over the next five years.

This is ‘unsustainable and dangerous’, we’ve been told by both political parties.

Will we destroy NZ Inc?

Over the past 30 years, we’ve been warned that being irresponsible with our nation’s money would earn the wrath of foreign investors and destroy New Zealand Inc.

Ratings agencies would downgrade us, and bond fund managers would lock us out of international financial markets, forcing our interest rates sky-high and destroying our currency.

We’ve been taught that fast-rising government debt’s bad and best avoided; that our government must be careful not to spend more than it earns; or crushing debts will push up taxes.

We’ve been told we risk becoming the next Argentina if we don’t get our budget back into surplus pronto and start repaying the debt. Loudly.

Both parties have committed to reducing net debt to under 20 per cent of gross domestic product (GDP) for the past 30 years.

The assumption is that this is a healthy level of debt that allows a bond market to function but gives New Zealand the freedom to not have to worry about bond vigilantes.

Debt to GDP will double

Yet, the government’s now forecasting net debt will rise to 56 per cent of GDP over the next five years. How could New Zealand possibly cope with more than doubling its debt-to-GDP ratio in just five years?

Should we be bracing for double-digit interest rates, a plunging dollar, tax hikes, and spending cuts?

The short and long answers are both no.

We know we don’t need to be afraid, because that’s what global bond investors are telling us through the prices and yields they’re willing to pay for New Zealand government bonds.

The bonds have spoken

Global bond markets are a great way to see how investors rate a country’s finances.

The price or yield they pay whenever a government issues a bond is like seeing the ‘wisdom of the crowds’ up in lights.

It’s the reason Italians, Spaniards and Greeks knew the bond vigilantes were revolting, when their government bond yields blew out. Prime ministers and governments rose and fell whenever those yields passed certain thresholds.

So, what does the world think of how New Zealand’s debt is shaping up?

Surely the bond vigilantes are revolting.

That’s why Jacinda Ardern refused to put up benefits by NZ$5 billion a year, as her own officials recommended, and why the Labour Government’s not planning to increase its state house-building programme beyond the current 8000 by 2024.

“It’s just not viable,” she said, three weeks before the election. She was worried the bond vigilantes would revolt.

But, where’s the revolt?

There’s one simple way to check: just look at the price and yield of bonds in most New Zealand government bond auctions.

Negative yields are a hot ticket

Yields fall when prices of fixed interest securities or bonds rise.

In the first week of October, the Debt Management Office of the Treasury sold NZ$450 million worth of four-year bonds for an astonishing negative yield of [rubs his glasses to check the number] minus 0.048 per cent.

That means some bond fund manager in Auckland or Sydney or New York or Zurich was willing to PAY Grant Robertson and Jacinda Ardern NZ$48,000 for the privilege of lending the government of New Zealand NZ$1 million for four years.

They weren’t even expecting a return over those four years for locking up that money in the Treasury of New Zealand. They were so confident of being repaid, they were happy with a negative interest rate.

A vote of confidence

That’s not a revolt. That’s as massive a vote of approval and congratulations as any masters of the universe could give. There were bids of NZ$3 million for each NZ$1 million of the bonds offered.

So, why is the Green Debt Monster always hanging around in the background? Why are our politicians so afraid?

Unlike in Robert Muldoon’s time, when rising inflation and interest rates meant we couldn’t afford to service our foreign currency debts, our debts are much easier and less risky to service.

That’s even more the case when the Treasury can issue bonds that don’t have to be repaid for 15 or 20 years. In October, it issued NZ$150 million worth of bonds maturing in 2037 at an interest rate of – wait for it – 0.908 per cent.

This is all possible because New Zealand’s forecast debt-to-GDP ratio will be less than half that of our peers’ debts, and less than a third of levels forecast for other OECD countries by the middle of the century.

They’re giving us money

That means that fund managers around the world are selling their own country’s bonds to the US Federal Reserve, the European Central Bank, and the Bank of Japan in exchange for freshly printed money.

They’re then trying to put that money into New Zealand’s coffers.

The trouble for them right now is they’re having to compete against our own Reserve Bank, which has pledged to print NZ$100 billion over the next three years to buy the same bonds.

There’s now a huge opportunity for the government to use that freshly printed money being serviced with nearly zero or below-zero interest rates.

We could spend on our youth

It could build housing, education, and health infrastructure for Kiwi young people, so they can become more productive, healthier, and happier.

I would say now’s the time to borrow much, much more for very long periods, and to invest in youth.

That’s the exact opposite of what politicians are telling us to do, and exactly what the ‘wisdom of crowds’ is telling us to do.

The so-called ‘debt blowout’ worrying the young should actually be seen as the opportunity of a lifetime, rather than the monster under the bed.

Definitions

Bond: A bond is a fixed-income investment where an investor loans money to a body (typically councils or the government) over a set timeframe for an interest rate.

Gross domestic product (GDP): GDP is a measure of a country’s market value. It covers all goods and services produced within a set timeframe and can be used to compare nations.

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