By Alex Tarrant
Prime Minister John Key is set to meet outgoing Bank of England Governor Mervyn King next month, and the topic of quantitative easing (QE) may be on the agenda.
Key is also set to meet British Prime Minister David Cameron and German Chancellor Angela Merkel to talk about the European sovereign debt crisis. He said it would be fascinating to get their perspectives on the crisis.
“I think it’ll be interesting to get everybody’s perspective on Europe: What might happen, where they see the Greek/Spanish situation playing out, what stress they see on their economy," Key told his post-Cabinet press conference on Monday afternoon.
The Bank of England's QE programme may be on the agenda, although that programme was not as large as the US Federal Reserve's programme.
"Last time I went to the United States, we had a much more extensive discussion about quantitative easing obviously with [US Fed chairman] Ben Bernanke and [US Treasury Secretary] Timothy Geithner," Key said.
"We might have a discussion with Mervyn King about it, but the UK aren’t really engaging in quantitative easing – not in the way that the United States is," he said.
The Bank of England announced earlier this year it would expand its QE programme, which it began in 2009, by 50 billion pounds to 325 billion pounds. See more on the BoE's QE programme on its website here.
NZ dollar driven up
Key, and Finance Minister Bill English, have both previously expressed their concerns to Bernanke about the effect the Fed's QE - where a central bank buys assets like government bonds from private institutions with newly created electronic money - on New Zealand's currency.
The idea behind QE is to inject new money into the economy by purchasing the assets of institutions like banks, which are then expected to lend that new money into the economy. Assets are generally government bonds, although include mortgage-backed securities and bonds of private financial institutions.
However, many institutions have chosen instead to build up capital reserves with the new money, and many have looked to invest it overseas in higher yielding assets than in the US, where base interest rates are zero. This is dubbed the 'carry trade'.
This has devalued the US dollar, pushing the New Zealand dollar up as US dollars are converted into NZ dollars for investment in assets here.
The higher currency has been the bugbear of exporters and Reserve Bank Governor Alan Bollard, who has noted quantitative easing carried out by major economies around the world - effectively competitive currency devaluation - has put upward pressure on the New Zealand dollar.
The Fed has carried out two rounds of QE. The first, in 2008, began with US$600 billion of asset purchases, which was increased to US$1.8 trillion in March 2009. The second round, started in 2010, included US$900 billion of purchases.
Markets are constantly watching for signs the Fed may embark on a third round if the US economy does not recover as well as the Fed wants. The Fed replaced its QE programme with 'operation twist' in September 2011, where it began to buy longer-term Treasury notes in a bid to drive down long-term interest rates.
(Updates with video of Finance Minister Bill English)
14 Comments
Its great that QE is on the agenda, and assuming Key has a more open mind to how NZ should react than he has appeared to show in the past, including undertaking QE ourselves, then kudos to him also.
By the by, contrary to the article, proportionately the UK has been a significantly larger money printer than the US, assuming the following figures are correct. The UK has printed 325 billion pounds over the GFC; and that amounts to approximately 23% of their annual GDP. The US has printed US$1.9 Trillion, and that equals about 13% of its annual GDP.
Clearly none of the US, Europe or the UK are going to print more or less because of NZ's opinion on the matter. It also seems very likely that they will continue printing. Hopefully therefore, given our already parlous current account deficit, and its corollary, exporters and manufacturers under huge stress (at least those still in business), Mr Key will consider proactive responses other than just sitting on our hands for another three years.
Exactly.
Our major trading partners (except Oz) have been doing that and we end up with a grossly overvalued exchange rate that kills exports and JOBS!
So if Bill English (helped by ignorance , the DMO and Bollard to borrow and hope) had instead printed that $300m per week that we just lumbered ourselves with for the next twenty years or forever.
We may have even scared away the traders if we did it in a lumpy manner.
Well I suppose it is only something you do in extreme situations, to fill a hole as it were. So you could do it to soften a deflation spiral where falling house prices leads to bank runs leads to riots/martial law/National Socialism. Or where the NZD gets so high it destroys the country's manufacturing businesses leading to state bankruptcy leading to forced selling of state assets.
My basic point is that QE is a tool. Like other tools (knives,cars etc) it could be useful if used well but disastrous if used badly or with mal intent. We just don't know what the safety rules are.
Answer to your questions above is here
http://sustento.org.nz/drowning-in-debt-qe-making-you-queasy-try-moneta…
The key points are:
- New money must got directly into the real economy (not bank balance sheets). The Christchurch Infrastructure Rebuild is an obvious example.
- It must be limited (2-3% of GDP is a rough rule of thumb, according to research).
- You need a valve on the other side to keep the money supply in check (if at all necessary), thus the term "monetary dialysis".
We could implement this policy tomorrow.....even in a small amount, just to show how straightforward it is.
Hi Stephen,
Buiter's original paper is here http://www.willembuiter.com/helinber.pdf
I'd argue we start small and go from there.
Actually this is a more detailed explanation from Buiter, as to the non-inflationary effects of a base money injection (page 13 onwards).
http://issuu.com/steve_jobs/docs/who-will-control-the-deep-pockets-_201…
He doesn't talk about a release valve on the other side but is clearly surprised as to the potential available non-inflationary stimulus available.
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