Many central banks are now considering winding down their money printing programs, perceiving that the heat of the COVID pandemic crisis is passing and they need to start to get back to 'normal'.
Of course, that doesn't mean they will be paying down the extra monetary stimulus they added, just not adding more to the reservoir. Draining those reservoirs is a project for another day (which might be quite distant).
So now is time to assess how much has been added by monetary authorities. (Fiscal additions are something else, although to be fair, central banks have been big buyers of emergency-issued government debt and therefore some of it does appear in their balance sheets.)
The amounts have been very large - but perhaps not as large as many have assumed and critics have charged. Central bank balance sheets in the three countries that interest us haven't grown to anything like annual economic activity. But the extra juice is substantial all the same.
The RBNZ's balance sheet has assets equivalent to 26% of NZ's current economic activity (GDP). That is up from less than 8% before the start of the pandemic.
Our Aussie cousins have grown their central bank balance sheet faster, raising it by +21% of GDP to almost 30% of GDP.
And the Americans have grown the Fed balance sheet to almost 38% of their GDP, but they started with higher levels having carried a lot of the burden from remediating the 2008-2012 GFC which hurt them harder than in New Zealand or Australia.
But interestingly, the extra COVID pandemic swelling of the Fed's balance sheet is less than Australia's and about the same as the RBNZ's.
| Growth over pandemic |
|||
| As at December 31, | 2019 | 2021 | |
| bln | bln | ||
| RBNZ Balance Sheet | $24.6 | $89.2 | |
| NZ GDP | $314.9 | $343.5 | |
| - % of annual economic activity | 7.8% | 26.0% | +18.1% |
| RBA Balance Sheet | $177.3 | $633.6 | |
| AU GDP | $1,972.7 | $2,121.2 | |
| - % of annual economic activity | 9.0% | 29.9% | +20.9% |
| US Fed Balance Sheet | $4,173.6 | $8,757.5 | |
| US GDP | $21,694.5 | $23,202.3 | |
| - % of annual economic activity | 19.2% | 37.7% | +18.5% |
If you have read this far, you might want to know how this compares to what happened in the Global Financial Crisis (GFC) between 2008-2013.
The numbers seemed scary then, but are just a shadow of the [decisive] actions taken in this latest economic crisis. The lessons of 'go hard, go early' this time seems to have substantially lessened the economic/social impacts, and the crisis has been very much shorter because of it. (However, we are now left with large public debt and many zombie enterprises, which will still have to be dealt with, even if we don't have the social problems of unemployment to the same extent).
Here is the GFC equivalent data:
| Growth over GFC |
|||
| As at December 31, | 2008 | 2013 | |
| bln | bln | ||
| RBNZ Balance Sheet | $26.9 | $22.3 | |
| NZ GDP | $187.5 | $228.1 | |
| - % of annual economic activity | 14.3% | 9.8% | -4.6% |
| RBA Balance Sheet | $158.8 | $128.0 | |
| AU GDP | $1,234.6 | $1,568.5 | |
| - % of annual economic activity | 12.9% | 8.2% | -4.7% |
| US Fed Balance Sheet | $925.7 | $4,023.6 | |
| US GDP | $14,899.0 | $17,133.1 | |
| - % of annual economic activity | 6.2% | 25.3% | +17.3% |
Yes, the RBNZ and RBA 'ended' the GFC crisis with slimmer balance sheets. You might argue that this restraint extended the social pressures over this period. Or you might argue that they were being more 'responsible' in their management of monetary policy, and giving themselves necessary ammunition for the next crisis (which did come of course).
And yes, the US Fed did carry a heavier load over this period, a global load given the global crisis was caused by them - but it wasn't enough to counteract their social pressures. But you can also observe that the run-up in the Fed balance sheet with the money printing in the GFC was actually similar to what they have done for the [shorter] pandemic response. (+17.3% vs +18.5%).
These comparisons also prompted me to check out the same data for Japan, which has a famous reputation for trying to stimulate its way out of low growth. What I found wasn't quite what I had assumed.
| 2008 | 2013 | Growth over GFC |
2019 | 2021 | Growth over pandemic |
||
| ¥ tln | ¥ tln | ¥ tln | ¥ tln | ||||
| BoJ Balance Sheet | 122.8 | 224.2 | 573.1 | 723.8 | |||
| Japanese GDP | 1,980.2 | 2,035.9 | 2,233.5 | 2,173.1 | |||
| - % of annual economic activity | 6.2% | 11.0% | +4.8% | 25.7% | 33.3% | +7.6% |
Yes, Japan has these same issues. They have lower economic activity now than before the pandemic, but for all the talk about the Bank of Japan's aggressive monetary stimulus over a long period of time, its accumulated balance sheet at a massive ¥724 tln is now 'only' at just one third of one year of economic activity in their country. While that is higher than some other countries in our short review, it is probably much less than most readers will have assumed. And it is actually less than the US Fed. Surprised me.
By the way, there is no indication that the Bank of Japan is contemplating any tapering or wind-back of their stimulus programs.
21 Comments
It's not the 'money printing' that's the problem, it's where they allowed that money to go. In our case the RBNZ and Government allowed, encouraged or drove most of it to go into residential property which builds no resilience, no employment and no earnings for the country. Their negligence is criminal.
Can you explain how any of the money printed by RBNZ went into residential property? I can't see how that can happen.
What RBNZ did do is keep interest rates low, which increased consumer demand for mortgages. When credit worthy consumers demand more loans from banks, banks create more money. This is where the money printing takes place.
RBNZ balance sheet explained - the RBNZ's liability to auhthorised bank sellers of government securities remains firmly in place offsetting the acquired assets subject to Crown adjustments.
Yes, this supports my point I think? RBNZ asset purchases (and FLP etc) suppressed interest rates and made borrowing cheap. This led to increased consumer demand for mortgages, and commercial banks responded by 'printing' money to purchase promises to pay from mortgagees.
murray86,
We are not alone. According to the BOE's own estimates, their QE led to a 20% rise in share prices. Theresa May when PM, said that QE had been regressive; "Monetary policy-in the form of super-low interest rates and QE has helped those on the property ladder at the expense of those who can't afford to own their own home". (July '16). In 2012, another BOE study showed that its QE policies had benefitted mainly the wealthy, and that 40% of the gains went to the richest 5% of households.
In May '13, the President of the federal Reserve Bank of Dallas, Richard Fisher, said that cheap money has made rich people richer, but has not done quite as much for working Americans.
Dhaval Joshi of BCA Research wrote that; "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".
Anthony Randazzo of the Reason Foundation wrote that; "QE is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy".
The minimum pay has been increased by miniscule amounts. The printed money is going into the accounts of the rich and powerful. The poor remain at mercy of government handouts. Is this not modern day slavery? When corporations are allowed to make millions of dollars of profits every quarter, shouldn't this be distributed in the people who work for these corporations rather than going into the accounts of owners who do nothing but sit in their mansions and travel in their private jets and yachts? Public needs to take action in their own hands, governments are in hand and glove with the rich. All bureaucrats are crooks.
... but for all the talk about the Bank of Japan's aggressive monetary stimulus over a long period of time, its accumulated balance sheet at a massive ¥724 tln is now 'only' at just one third of one year of economic activity in their country. While that is higher than some other countries in our short review, it is probably much less than most readers will have assumed. And it is actually less than the US Fed. Surprised me
The Bank of Japan do not have to purchase lots of Govt bonds to control the price of those bonds (and the corresponding yield curve). They just have to demonstrate that they are willing to step in and make purchases as and when necessary to set the price. The market toes their line.
Economists’ R*, or R-star, is a fiction. It’s one that they came up with after-the-fact to try to explain why their policies didn’t actually work the way policymakers had initially promised. While in public, officials still speak glowingly of each QE, one after another after another, in private they know it deserves absolutely no praise.
Study after study has shown basically the same thing (this pulled from a 2012 IMF research paper):
Research on the effectiveness of earlier quantitative easing has yielded mixed results, with most pointing to limited effects on economic activity. While most papers found evidence that quantitative easing helped reduce yields, its effect on economic activity and inflation was found to be small. The reasons cited included a dysfunctional banking sector, which impaired the credit channel… [emphasis added]
Helped reduce yields. That’s a very curious way to frame (in order to arrive at “mixed results”) what is its only detectable, possible contribution. In fact, even this much is debatable; ask yourself, what is it that QE is always “helping” lower rates? As I put it last week “celebrating” the undeserving theory’s unholy twentieth anniversary:
In other words, falling rates correlate with QE’s if only because rates are already falling by the time central banks get around to conducting these programs. And if yields are already dropping as things get bad enough to convince central bankers to unleash their psychology, what good are even lower interest rates than the low rates bad things have already brought up?
This is where R* supposedly comes into it. The modern central banker’s only job is to figure out a way to influence behavior; but you can’t put “behavior” into an econometric model. Thus, an imputed “natural rate” seems a plausible enough stand-in to the detached statistician with no real feel for actual economics (small “e”). To achieve success, in the regression analysis, the Fed or ECB need only drive rates below computed R* – even if the market itself is already pushing them lower. Link
Hmm. QE very obviously influences the price of bonds on the secondary market and thus the price / yield of of bonds on the primary market (given that primary dealers sell bonds into the secondary market). A central bank can therefore intervene to exert considerable influence on the price / yield of bonds. The idea that the impact of this intevention is an illusion, or somehow 'after the fact' (rates are already falling) seems a bit of a stretch to me.
It might be worth pointing out that up until now NZ has not had the pandemic, we have had a lot of preventative measures and anticipation. It's possible that omicron will finally give us the actual pandemic. If, as seems to be happening, the RBNZ tightens during the actual period that everyone is getting sick and or dying or not having symptoms, whatever the case may be. If the RBNZ tightens then, does that not indicate that the prevention is worse than the event? It's almost as if the symptoms of the prevention are being treated as if they are worse than the symptoms of the actual virus itself, at least from a monetary policy point of view.
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