Capital Gains Tax

[rpcas]

I feel you are getting way off track and losing the point here. We are talking of the government printing money. This implies they are spending it, sure they could print and keep it at the reserve bank, but this is the same as not printing it at all as it would not enter M1. When I say "printing money" I'm obviously talking about the government printing money and spending it.

Yes, but whether or not that "money printing" results in inflation depends on whether the private sector goes on to spend. If for example the government "prints money" and gives it to beneficiaries who then go on to save it, then inflation won't be a problem.

This is the situation NZ is in now. The private sector is de-leveraging, so big government deficits are not nearly as inflationary as they otherwise would be. Remember inflation of the sort we are talking about is caused by excessive spending.

A agree; in your two examples financial assets do increase by 300. However in one M1/M2 increase by 200 and the other by 300. The long term impact of both is an increase in cash when the debt is repaid but in the short term this is not the case.

Those that buy the treasury securities don't then use them to trade for goods and services. When the government spends by borrowing they still pay in cash, those that get the deposits are the parties who wish to save.

Yes, agreed. However the key point here is that the people that buy the Treasury securities (banks, insurance companies, funds etc) wouldn't be spending anyway. It is ridiculous to say that "Those that buy the treasury securities don't then use them to trade for goods and services" because they wouldn't anyway. Holding Treasuries instead of cash in no way alters these firms/savers propensity to spend, and therefore won't alter inflationary pressure.

Government sells 100 securities to China, China needs to purchase those treasuries with NZD. To do this China first purchases NZD and then uses these to buy the NZ government securities. The NZD is removed from the economy and both M1 and M2 are reduced.

Note that China doesn't then use those treasuries as pseudo cash to buy stuff. Also note if later on they do need cash then they can sell the securities but this takes the cash out from elsewhere in the economy.

The same would be true if it was an NZ investment fund instead of China purchasing the government securities. Except in this case it would not need to go through the intervening step of purchasing NZD as it would already have local currency.

Agreed, but would China Central Bank be spending their dollars if they didn't hold securities? No, they would hold them in their reserve account at the RBNZ. Whether they hold the securities or not (if Treasuries weren't issued), and is not relevant to inflation, despite the differences in M1..

Remove this spending and you lower the crowding out of private investment. Removing spending means less inflation and lower interest rates. This in turn means people borrow more to invest elsewhere. It also means households have lower interest costs which mean they can return to spending sooner.

Government spending only crowds out private investment when the economy is almost or fully employing their resources (in which case more investment will lead to inflation). This is not currently the case in New Zealand, with 6% (?) unemployment and untold underemployment.

On the other side of the spectrum, if the government doesn't net spend enough, then businesses sales won't increase fast enough, and the firms won't bother investing. Firms invest when they face increased sales/believe future prospects are better. If the economy isn't growing, then these firms won't invest.

The only thing we need to be careful of is that property prices don’t start ramping up again, which is why I’m quite happy for a tax on property. Now whether this is in the form of FDR or CGT is a fair argument, and it is an argument which needs to be had.

Agreed.

Thanks for reading.
Te Whetu

Thanks for the discussion!