By Raf Manji*
Quantitative Easing (QE) first entered popular language during the 2008 Global Financial Crisis.
Central banks, specifically the US Federal Reserve (Fed) and the Bank of England (BoE), tried to provide stimulus to their economies by buying government and corporate securities from banks.
The goal was to free up monetary conditions and, thereby, to induce an increase in lending and, as a result, new economic activity.
As interest rates fell to zero, the Fed began QE1 in November 2008 with a $600 billion purchase of Mortgage-backed securities (MBS). It did this by creating new credit in its own account and then exchanging this for the MBS held by the banks.
The purpose of this was threefold: to improve bank balance sheets, raise the price of securities (and therefore reduce interest rates along the yield curve) and stimulate new borrowing. This was not an entirely new policy, as Japan had been engaged in the same process for over 10 years, though with limited success. The Bank of England followed suit in March 2009 and started buying UK Government bonds and a limited amount of other high-grade assets.
The initial impact was felt in the asset markets with the price of stocks, bonds and commodities all rising.
In fact, rising commodity prices were seen as an unwelcome side effect of QE, given that QE was supposed to boost lending and, therefore, economic activity - more specifically, new jobs. Banks were supposed to be lending these excess reserves, not speculating in financial markets.
The reality was that banks had no interest in lending and businesses and consumers had little interest in borrowing.
The central bankers had failed to note that they were in the middle of a huge debt bubble and that offering new debt into a market saturated with the stuff was hardly going to be a winner.
There is no doubt QE helped restore confidence to the financial markets and, as a side effect, helped steady the general economy. Whether it actually worked in the manner it was supposed to, is highly debatable. As Bank of England Governor Mervyn King stated when giving evidence to the UK Treasury Committee on QE,
“I can’t guarantee that it (QE) means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done”.
In terms of impact, the US bailout of the auto industry had more success with over 1 million jobs saved. Whilst the financing aspects were contentious, the outcome has been positive. As Obama aides noted, direct government funding enabled the auto industry to survive and this would not have happened if it had been left to the market. Setting aside the merits of saving the US auto industry, what was crucial and different about this policy was that it involved spending direct stimulus into the real economy, where people are employed to make products.
As Nouriel Roubini noted, the US Government would have been better off just spending the new credit used for QE directly into the economy. He suggested in a co-authored 2011 paper that there should be a massive infrastructure rebuild ($1.2 trillion) in the US, which would create jobs and lay the foundation for “a more efficient and cost-effective economy”. He further noted that the crisis had been exacerbated by “inadequate action” by policymakers who had an “inadequate understanding of what ails us”.
It’s clear that policymakers have not stepped back and tried to understand both the causes and outcomes of the crisis. In a debt deflating system, no amount of new debt is going to help the problem. Until the bad debt has been cleared, new investment is unlikely to happen and the economy dies a slow death. One option that hasn’t been considered, as Roubini alludes to, is to actually stimulate the real economy directly i.e. the economy that produces real goods and services. Governments can actually print new money and spend it directly into the economy through infrastructure projects. That way the money directly enters the economy and supports real economic activity, in a way that QE was supposed to do but never did.
The Sustento Institute actually proposed this type of policy in 2011, immediately after the devastating February 22nd Christchurch Earthquake.
A direct injection of $5 billion of new money was suggested as a way of financing new and necessary infrastructure for the rebuild of the city. At that time, this was calculated to save around $200 million a year in financing costs and avoid further increases in government debt.
Ironically, the Minister of Finance rejected this, on the grounds that it may cause “an adverse combination of high inflation, arbitrary wealth transfers and a loss of confidence in the creditworthiness of New Zealand”.
This response supports Roubini’s position that policymakers simply do not understand the problem. In the case of New Zealand, the Minister of Finance seems to be quite happy to keep borrowing money and worsening the financial position of the country.
As has been seen, inflation is non-existent in a debt deflating economy.
Of course, any new injections of new money must be carefully monitored and be at a level which is not likely to cause over stimulation of the economy. As Willem Buiter, a former external member of the Bank of England’s Monetary Policy Committee notes, an injection of base money “even in huge amounts, need not become inflationary ever”. Buiter goes on to state that “any inflationary increase impact of the enlarged stock of base money on the stock of bank credit or broad money can be neutralised by either raising bank reserve requirements, or by raising the remuneration rate on excess reserves held by banks” .
Thus, inflationary concerns can be set aside when this double-sided process is undertaken. This type of intervention has been called 'Monetary Dialysis' , where clean money comes into the system (newly minted e-notes) and replaces or causes a reduction in debt money (bank credit) in order to keep the money supply at a prescribed level.
In this process, all the objections raised by the Minister of Finance are dealt with. Infrastructure is rebuilt, people are employed, goods and services are provided, inflation is stable and money is saved, as there are no financing costs incurred. As to the creditworthiness of New Zealand, it is more likely that this will improve as debt falls and the productive economy recovers.
What’s not to like about that?
----------------------------------------------------
Raf Manji heads the Sustento Institute, a think tank based in Christchurch
70 Comments
Visionary ? its been used over the centuries in many forms, so often with very poor outcomes. Its a risk, one that perhaps some countries have placed themselves in such a desperate situation that they had to take it - NZ is not in that situation by any means at this point of time.
Yes, its not inflationary currently with velocity having collapsed in the past decade, and yes it does give an economy a boost when you action it (be it a diminishing one over time), but it also has a quite negative affect on the economy when you stop the printing - check out the US cycles of the past 3-4 years for instance. So, negative when you stop, what happens when you have to inevitably reverse the process i.e. take the money out of the system, when velocity eventually recovers ? Someone elses problem, be it potentially a very big one ?
I for one am damn pleased that English has not adopted the magical solution that cures all ills with no consequences.
Spoilsport.
After all the negative comments on Bernards Sunday article http://www.interest.co.nz/opinion/59623/bernard-hickey-argues-government-making-no-progress-rebalancing-economy-if-fact-he-sus including those of Grant A, this is a refreshing option to consider.
Yes it has been used but what are we doing here?
Most of out trading partners have used QE and artifically lower their exchange rates. Hence NZ sees its rate far too high to allow more employment in export industry. Our bozos in Government, RB and Treasury are unable to see anywhere but down the tunnel to serfdom for our citizens.
Grant A – I’m talking about the person Raf, http://sustento.org.nz/ Please, read my comments correctly.
Grant,
I'd be interested to know what examples you had in mind in terms of this type of process being used previously ("used over the centuries in many forms").
I would add the proposal works by making sure you don't have to drain money out of the system at a later date i.e the term dialysis. The goal is to keep the money supply stable. Monetary dialysis is not the same as QE, as employed in the US and UK. That's an important distinction to make. As Roubini noted, it would have been better had the US govt actually spent money directly into the economy, as opposed to supporting the banking system.
Raf - apologies, I have to admit that I was thinking US QE (plenty of examples of that throughout history as you will be aware) and had only read the first part of our article on your site. However, as I say, whilst the debate's good, but I'm still not comfortable that a small country like NZ, with a propensity for inflation, even when the monetary base is stable, is capable of successfully managing monetary dialysis as you term it.
Compared to the far larger and more sophisciated Sterling market, I can't imagine the foreign exchange markets reacting too well to news that NZ had commenced it. And a NZD suddenly at 50c complicates the RBNZ's inflation management even further. It is one of those ideas that can only be proved successful or otherwise with the benefit of hindsight, so only to be taken when desperation completely sets in, frankly as it has in the UK and US.
As I mentioned the other day, the Romans used it in the first half of the 1st Century AD, and it worked well enough for them:
...the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.
Translation of Tacitus Annals 6.17
Grant. Thanks.
Fair comment about the ability to manage MD in NZ. Two points to think about:
1) You could start with small amounts. $100m for example. Just to show how straightforward the process is. Even though you coud argue this is not needed right now (because of and in spite of Christchurch) it's most prudent to at least put the wheels into motion. Personally, i think we should be doing this right now, in order to get debt levels down but I understand some may disagree.
2) If the proposal is properly explained i.e leads to better outcomes (less debt), then the currency impacts will not be so extreme. Markets tend to respond badly to forced action (e.g. Sterling being ejected from the ERM) rather than carefully thought out policy shifts.
Fair point Kunst, I was commenting on the idea not the person, although it was hard to tell the way you mean't it from your comment. Debate is good and theres no doubt to my mind that we will eventually get to see the consequences, or otherwise, of massive QE because I'm sure that where some countries are headed. But Raf isnt the only person working/worked in NZ markets with alot of years in markets offshore who has an opinion, in this case a contrary one.
Raf can we be sure you are not the 'wolf in sheep's clothing' with elitist aims?
Ah, love! could thou and I with Fate conspire
To grasp this sorry Scheme of Things entire,
Would not we shatter it to bits - and then
Remold it nearer to Heart's Desire!
The Rubaiyat of Omar Khayyam
(Fitzgerald's translation)
Your US Auto industry bailout comments raised alarm bells.
In terms of impact, the US bailout of the auto industry had more success with over 1 million jobs saved. Whilst the financing aspects were contentious, the outcome has been positive.
The Treasury spent $51 billion for a majority stake in GM, $4.4 billion of which has already been written off and $23.2 billion of which has been recovered in a sale of stock to the public. That leaves $23.4 billion. If the government sold its remaining 500 million shares at current prices, it would receive roughly $12.5 billion, for a loss of $10.9 billion. The government got out of its investment in Chrysler at a net loss of $1.3 billion. Read article
The government still owns 74% of Ally, and it's repaid only $5.5 billion of $17.2 billion it got in the bailout so it could keep offering car dealer and buyer financing for GM and Chrysler. Ally received more than twice the taxpayer help as Chrysler. Read article
Raf who is deemed competent to pick the winners with all the pork barrel politics that go with it?
Stephen, A good question. The US Auto bailout is not the best example of what i am talking about, as it was a bailout. Still, it stimulated the economy, even if clearly, there was no business case for it. I would have preferred investment into real infrastructure, which would have created many jobs and productive assets.
Still, it's worth noting that this is not a big spend up free for all. Governments still need to keep to their budgets (preferably balanced) and the process of budget allocation will no doubt be similar to how it is now (that's open to debate). The ultimate goal is to reduce public debt to zero over time, not engage in huge spend ups. However, there will be savings from lower financing costs and so that could be redeployed (perhaps a tax credit for paper boys?) or used to pay down debt faster.
The Christchurch rebuild is a better example, as that work actually needs to be done and will be done, so why borrow overseas to do it?
The Christchurch rebuild is a better example, as that work actually needs to be done and will be done,
Perhaps off this topic but why does Christchurch need to be "rebuilt" beyond what it is that insurance monies collected for replacement of insured assets provide?
What most people fail to realise is that most older properties in the CBD of brick construction had indemnity insurance only, which is a minimal dollar value.
As an indication of how low indemnity values were likely to be, many of the 2007 GVs on Manchester St give value of improvements at between zero and $20,000 (almost all value was the land) - even for huge buildings with 1000m2 floor areas!
128 Manchester 4 level unreinforced masonry building of about 1500m2 floor area 2007 value of improvements $0:
http://ratesinfo.ccc.govt.nz/PropertyDetails.aspx?RateAccountNum=730378…
139 Manchester approx 300m2 building VI $16k
141a Manchester approx 200m2 building VI $14k
147 Manchester approx 300m2 building VI $17k
Throw in CERA's demolition costs which were astronomical and many owners have no insurance payout left at all and even the well insured won't have enough to rebuild a similar size building.
Then it's also debatable whether any rebuilding is actually required when numerous existing buildings which are well built single or 2 storey buildings with no or very minor damage in the heart of the city, on sites which have been open to the public for 9 months still sit vacant and available for tenants:
http://www.primecommercial.co.nz/1774320
http://www.primecommercial.co.nz/1647039
1. The insurance management by central and local government was insufficient for IS assets. If you let Canterbury fall into a total fail the effect will be sufficient to result in a correction to NZ credit profile. GDP has been help up to a degree by spending in Canterbury..I suspect more than you actually realise. They are buying for time.
The insurance management by central and local government was insufficient for IS assets.
Has there been some sort of list/study of this released publicly - reconciling public IS assets damaged vs insurance coverage vs repair cost estimates? I know that is what we've been told by the good Mr Parker but I've never seen any kind of detailed assessment released by CCC and/or central government for that matter.
Would be keen to read such a document if it exists.
In terms of "they are buying for time", I assume you mean central government are buying time with Moody's and S&P in terms of a credit downgrade - so, does that imply you don't think they actually intend to spend the billions (or whatever) they are suggesting they will? Or are they buying time in waiting for all the private insurance dollars to arrive (and thereby 'save' our precarious economy?
I don't know - perhaps I'm overly suspicious but I just wonder whether some kind of deal was put together between the insurers/reinsurers and the government. It just seemed odd to me that the issue of reinsurance (apparently) was secured so soon/successfully after the event - was there potential for some kind of tradeoff?
Raf, it's a fine argument in a theoretical world. The "infrastructure" that would have been built would have been Rugby Stadia for the Rugby World Cup. I know that sounds unlikely with hindsight but at the time of the earthquake most people thought the RWC would make money in some miraculous way. Convention centres seem to be the current folly that has replaced stadia.
I realise this is not a reason not to try out your plan but it is a worry.
Ditto what Raf said. Funding eq damaged core infrastructure like this is a no brainer. "core infrastructure" will HAVE to be fixed, but the funding of it, presently, will end up being more inflationary because it will be debt+interest. Bangs head against wall. Ask why, again?
While I agree on USA and UK) QE being done badly ie it should have indeed gone into Govn spending on one off [green] infrastructure I cant agree it should have been spent solely into Chch. In nation terms it makes no sense IMHO to rebuild a dead/dying city like Chch....building buildings and services to rebuild to "as it was" when huge changes are afoot makes poor sense IMHO....thankfully our powder has been left dry for another day on that one.
Now if we look at one off projects such as electrifing the main trunk(s) end to end.....investing in tidal energy and hydro and geothermal, kicking in bio-deisel plants and heavier research grants/tax breaks, then yes......
The USA had/has a huge opportunity to spend large amounts via 10 year bonds to build in a decent infrastructure....that will provide resiliance and jobs.....and a future....now $ but especially time being wasted.
In terms of NZ doing QE,
1) Once the genie is out putting it back would be very hard, possibly impossible....ie being cut off from the bond market is a real possibility if we do too much and it takes mere weeks to sudden meltdown.....once in that phase its over IMHO. Sorry but I agree on BE on that.....
2) we are not reserve currencies and not considered safe havens....jusook how fast the NZD is dropping right now and we have done nothing to "deserve" that......give a real reason like QEing and hmmm not sure that would turn out well at all.
US car industry, well when you look at the price of oil/petrol out into the future Im afraid I see it as nothing more than can kicking.....it saved the jobs right now but there should have been a path to a "new sustainable future" set in place....they have not so they will need bailing out again....and again....until something gives.....5 maybe 10 years.....(suspect 5 myself).......
regards
Steven,
Thanks for the comments.
I'd disagree that Christchurch is a dead/dying city. I don't think it's going to be rebuilt as was but I'm interested to know what you mean by "huge changes are afoot". I should note I live in Christchurch and have done so for 10 years. Still very happy to be living here.
You need to re-read the article (and perhaps the links). This proposal is not QE.
1) Under this proposal, we would sell less bonds. That is unlikely to cause problems, as we will be accessing the bond markets less than before. There is an argument that we need to have some kind of government bond market in order to help out the local savings market but that is a different debate.
2) The NZ$ goes up and down for the same reason: the S+P500. It has fallen recently against the US$ but not so much against other majors. Given our current account deficit, it needs to be much lower. I believe this proposal will have marginal effects on the currency. On one hand we will have less public debt (mildly supportive of the currency on the credit front, less so on the rates front), on the other hand we may have less private debt (less bank credit, so perhaps less overseas borrowing, so mildly unsupportive).
i like the idea off investing in a renewable ebergy and transport infrastructure, which provides more self-sufficiency (and so less oil imports) but that is outside the limits of this proposal.
Stevens negativity always appears to get the better of him :-) Clearly Christchurch is changing and may continue to reduce in population...that is not the same as dead or dying. The key elements of the economy are still here...raf you are soo kind to him :-) He has shown no ability to adapt so lets be happy he doesn't live in Christchurch for his sake.
Cities like Chch represent a long period of development and expansion based on cheap fossil energy. To rebuild Chch will take large amounts of fossil energy and it only makes sense where there are the businesses and ppl to do this (to its old scale/size). So two aspects, 1) Looking at [re-]insurance and risk and impact chch would seem to be expected to keep shaking for some years, businesses and popualtion will not wait. 2) Throw in Peak oil is a paradgym shift (huge changes) in energy cost and availability and at that point I wonder if chch will ever "recover".....
Bonds are a debt, a call on future work.....see peak oil...if you cant do the work how do you re-pay the bond?
Now I can agree we need "war bonds" but that is for new green/sustainable energy infrastructure nation wide and not for new buildings that are probably not going to be utilised in one spot.
The problem of this proposal is everything is an IOU for work and energy......gold is described as a store of value, really it converts as a currency to get ppl to do work...paper money is the same thing.....debt same thing. so when you say its outside the proposal you are putting a false wall around the problem and ignoring a fundimental, hence you will fail.
regards
Steven,
I'm not sure exactly what your point is here but I'll do my best to respond:
1) I'd say since the Industrial Revolution, most cities are built on the basis of fossil fuel energy. Christchurch has an opportunity, unlike most cities, to actually rebuild in a manner, which supports the population (350,000 people are not going anywhere else) in the most sustainable manner possible. As to the seismic issue, it seems that we have the technology to build well above the new earthquake code and Christchurch will, in fact, be a lot safer than, say, Wellington. People do seem to be quite down on Christchurch, but I'm guessing they don't actually live here.
2) Peak oil is certainly an issue, but it is of no more relevance to Christchurch than anywhere else. I'd argue that Christchurch is actually at a huge advantage to most cities, given the abundant natural resources close at hand. We are surrounded by a geographical food basket, with the sea on one side, productive farmland on the other and lots of accessible water. As I say above, it would be very smart to rebuild the core infrastructure with an eye onfuture developments, as well as energy security.
I'm not talking about bonds, so not sure what you mean by that.
I agree money, in all forms, is simply a claim on resources and labour. How that money comes into being is, therefore, very important. Should it be created as debt or currency? That's the real question here. Resource issues are also of critical importance but that is more a question of how the money is spent, rather than how the money is provided.
Thanks for the eloquent reply...
To rebuild will cost lots of energy (money) that has to be financed and repaid with interest. The problem is how to make sure you are doing the right sort of and scale of work for the future need and yet that honestly isnt clear in the slightest. I see nothing to indicate anything but rebuild as if its "business as usual" scenario. Even if you could build in excess of the building code (and that entails more energy/money) it has to be [re-]insured....take an example of that in ABS on cars...the argument was it should see less accidents and the reply of the insurance companies was, yes but it costs more to repair so its self-canceling.....(not sure if they are allowing for personal injury)
350,000 ppl again assumes business as usual and not say a whole change to being more dispersed.......
"Down on Chch", I was actually looking to move there as that is my wife's home city but was unable to.....recent discusions indicate that her mind has been significantly changed...So down but only in re-building it as if we could continue the infinite growth paradgym. That cant be done.....
I think chrisj was a PI down there? he has now moved to Auckland? and has invested there?.....such stories if extensive speaks volumes for chch's future not being, shining shall we say. If that's typical....just how much repalcement infrastructure is appropriate? maybe a lot less, 20%? 40%?....
In terms of Chch's advantages yes I agree, it does have like say Palmerston North huge advantages....just like NZ really....
Bonds as in funding it some how...maybe I misread you...
"Should it be created as debt or currency? That's the real question here." what is the difference? both are an IOU for work/energy...a future call on it, Im not Im succeeding in getting that across. The issue here in a way is a productive return. From my perspective if you build the wrong thing or too much there will not be the return....which means default, which means someone else suffers.....
In some ways peak oil might effect chch more as there is no already existing assets to adapt and re-use. For instance adding insulation to an existing house that has already had the energy to build it expended costs $10k (say) a new well insulated house $250k (say).....which is a huge difference in energy....
regards
"....jusook how fast the NZD is dropping right now and we have done nothing to "deserve" that"
Frankly we are doing everything to deserve a drop of way beyond what has happened so far. The inflow of insurance money is a one-off and commodity prices are softening by the day. Asian hot money is probably finding its way here as reported it heads for other larger markets. All of these are one way....down. The tradeable sector is still being destroyed by government inattention.
It is only the traders that are holding us up. A NZ$ closer to US65c is closer to where we should be so shaking the tree with even the threat of QE would be justified
The NZ Herald have reprinted some comments from George Soros's website , " Time is running out for the Euro " ..... he gives them just 3 months to correct their course of action away from austerity ......
.." ... you cannot get out of debt by shrinking the economy , you have to grow your way out .. "
Someone pop over to the ECB and ring the alarm bell , time they woke up , and did summit ...
If we are to experiment like this (I'm not convinced of it's merits and I cant imagine Goldman JoKey going for it) surely it would be better to reestablish a core Ministry of Works and do really big things like the 1950-60's hydros or bridge Cook Strait ? Rather than just give the money to Fletchers.The trick then would be keeping the Waitangi Tribunal off it once finished!
Ergophobia
first, put policy in place to make sure the banks dont get the money straight back. they will look to issue more debt on this wealth, so lvr's would be a start.
put money directly into infrastructure like roading, mining and energy.
maybe even startup funds for scientific research and export business.
its got to be better than the 20bn we are currently investing in welfare.
I just don't believe it can be so simple, your plan speaks nothing of moral hazard, nor the inflation effect of bundles of cash arriving in Christchurch for the rebuild, this is very likely to drive up prices with a follow on of more QE etc, etc.
Your examples speak nothing of the Obama driven subprime car loans now proping up the car market in the US, nor did you address that issue of a collapse of GM and what may have arisien from the ashes. This senario may well have provide less jobs but these jobs would be sustainable.
If firing an economy up is as simple as printing money, the world would not be in the current mess. As for quoting Willem Buiter, he maybe an esteemed economist but he now also works for Citi Bank so has a vested interest.
In my mind Japan is an example of QE not working, yes inflation may not be a problem, but the Japanese are savers unlike Kiwis and Japan has a positive balance of trade supporting its economy providing, for the time being, market confidence. NZ has does not.
Lastly I would not trust politicians to not become addicted to QE.
I am not an economist, but I am sure that for the problems facing NZ, mostly driven by uncompetitivness for many reasons, a quick fix will surly blow up in our faces, creating an even bigger problem than today.
Robo47, thanks for the comments.
1) It is as simple as it sounds (almost as simple as banks creating new credit).
2) There is no moral hazard in that any new money must sit within prescribed limits (as with the CPI target).
3) I'm not considering the inflationary effect of funds flowing in for the Christchurch rebuild specifically. The country is running well below full capacity, business people within the supply chain here have told me there is no reason for prices to go up, as there is plenty of slack in the supply chain. Of course, that doesn't mean there won't be an element of profiteering but that is unrelated to the specific proposal. The money is coming regardless of how it is sourced.
4) This is not QE.
5) See my above comments to Stephen about the car bail out. I agree the car bail out was not a great idea. i was merely using it as an example of directing resources to the real economy.
6) The world is in the current mess because of the way money is created as interest bearing debt. This proposal is not going to stop that, but it will change the balance between currency and debt within the money supply. Hopefully, that will make the money system more stable and less prone to excessive bubbles.
7) Buiter has been writing about monetary theory for many years and ihas worked in many institutions, including a stint as an external member of the Bank of England Monetary Policy committee. He's a straight talker and quite independent, regardless of his position at Citibank.
8) Japan has a different shape to its economy but it has spent 20 years divesting itself of seriously debt laden banks. It is also a very mature economy and has a different consumption profile. It's difficult to compare it to NZ.
9) This is not QE. This policy will be managed by the RB under targets set by Parliament. There are no free lunches here, just cheaper financing costs and a better current account.
10) NZ's main problem is 40 years of living beyond its means. This is not a quick fix, as it will take at least 10 years to eliminate our public debt but it's a start in a different direction.
So which would you see as best Raf....the govt borrowing billions to pork benefits to win votes and boost economic activity...until the day after the election...or would you opt for a govt reducing paye and gst using a real surplus that had been stashed over the good times?
... you need to arsk a true professional expert for an answer to that , where's Sir Michael when you need him !
Sir Michael Cullen !!!! ......... oh lawdy lawdy , that's gotta be the funniest thing in NZ since they gave a knighthood to Labour's favourite union man , Tom Skinner .....
More to the point they managed to squash any form of reasonable competition for years and years and years through their many, many, many delay, deny, deceive tactics. I wonder what the amount of taxpayer dollars (not to mention TelstraClear's costs as well) were spent in litigation between we the public and Rod at the helm? Number portability (well lack of it) as a single issue alone cost NZers millions and millions in lost productivity and squandered efficiency savings. Telecom provided the perfect case study of what happens when an infrastructure monopoly falls into private hands under an ideological 'hands off' regulator.
Is this a trick question?...I guess my point is that government's should never have to borrow to boost economic activity. If we are in a recession, then the government can boost spending directly, not by borrowing more (generally not a good idea).
Primarily, that is because a recession generally indicates a contraction in the money supply or rate of growth, as debts are written off and lending (new credit) slows. The mistake governments have always made is borrowing to cover deficits.
Running a surplus is a good idea and, if that is the case, then either keep investing in core public services or cut taxes. I'm not sure if this answers the question.
This is territory that has been gone over before RAF so don't worry about Wolly's sort of in house joke. If you are familiar with the work of a regular contributor here, Iain Parker( http://publiccreditorbust.blog.com/ ) then the fault identified by Wolly is that politicians are still in control of money supply. Therefore it does not address corruption.
Your comments on debt saturation make you a rare breed. Try this (M.V)+i=P.Q where i is interest. Needs to be understood there is a time lagg involved :-)
Infrature spending would not be wasted if used to set up a post oil transport network. Rail, small coastal shipping and perhaps even canals where appropriate.
Scarfie, thank you.
Corruption is always an issue and it comes in many forms. It's part of the ongoing challenge under any political system. Still the more transparency the better and i think our current Policy Targets Agreement works well. We just need to add in a few more variables :-)
If you are interested in Fisher, then have a wade through this paper by my colleague Lowell Manning, which was given at the NZAE conference by in 2009. It's a reworking of the Fisher Equation. His work has moved on since then but it's a useful place to start. Once you've munched through that you should check out the more recent work. It's a constant work in progress.
I agree investment in a post-oil transport network will have huge benefits in the long-run. The less exposure we have to overseas energy requirements, the more stable our economy will be. We should be aiming for complete energy self-sufficiency. We have the resources and the skills, so what are we waiting for?
Raf,
Delighted to see another champion of QE in some form. The logic re avoiding just printing money and trying to channel it through the banks; when many people are trying to deleverage seems a well made point. As with other writers here I have some doubts also on picking infrastructure winners; although I most certainly would print the money to do whatever we are doing anyway, rather than borrow from overseas to do so.
Separately, now that the world has endorsed the idea of QE in various forms, it seems to me we might as well make the most of the opportunity while there can be no smacked hand internationally. Especially as other countries have most certainly used QE, deliberately or not, to keep their currencies down and competitive.
So it seems to me a burst of QE to pay off some overseas debts seems very prudent. It might cause some minor inflationary impact in some foreign land, as they are forced to have their money back; but given they have forced their QE on us, am not sure we should feel bad. Yes it would bring the NZ$ down, (which would be inflationary, all else being equal)but as I think Basel Brush and others have noted, a NZ$ closer to US0.65 is probably closer to fair value, and competitive.
Separately, I do believe QE through the banks, replacing money they are sourcing from Switzerland and other places, would be well placed.
I would be interested in your views on any downside from either of these approaches.
Stephen L,
Thank you. Again this is not QE. Monetary dialysis is increasing the % of currency as a proportion of the money supply, which currently, is created primarily by banks, in the form of new credit (thus the term excessive credit creation). It is a demonstration that governments, in control of their own currency (Europe's problem), do not need to issue debt to fund themselves. They can, within prudent limits, simply print currency, in the way that banks create credit.
I don't like QE at all. It's a rdounabout way of trying to stimulate an economy, and is usually at the expense of the taxpayer and the benefit of the banks. What should have happened, is that any bank in trouble should have had its equity wiped out and it's bondholders converted to equity. That's what happens to ordinary businesses when they get into trouble. Banks, however, have extraordinary power and find politicians and regulators quite easy to control...to be fair many politicians move between the two quite smoothly (e.g Don Brash: RB Governor to National Party leader to ANZ director to ACT Party leader). Don't get me started on the US!
QE is really an extensive of the idea that appropriate monetary conditions are all that is needed to run an economy. It, like the sole use fo interest rates, ignore the role of that debt plays in the system. In a post-bubble, debt deflationary situation, no amount of cheap money is going to stimulate the economy. So QE simply ends up helping banks to repair their balance sheets at the expense of the taxpayer.
MD is a more direct and straightforward approach, as it deals with the real economy, which is what is needed.
As to the currency, I don't think it makes much difference. NZ$ is artificially high and is preventing us from re-balancing our current account. So a lower NZ$ would be an appropriate adjustment.
Raf,
Fair anough in that I have incorrectly used QE as a euphemism or catch all for all forms of printing money. One of my questions was then whether we should be borrowing from the banks or others- where the ultimate source of that borrowing- apart from the banks just creating money themselves- are overseas funds. If instead of borrowing say $15 billion a year to fund its deficit, the government were to just print say $10 billion, and borrow the rest, that presumably would be your dialysis, and mean we had lower debts as a country. A useful benefit would be that the currency would drop as a result, making us more competitive, as you acknowledge would be helpful. Given this spending is already happening, this move wouldn't be particularly stimulative, but would mean lower debts. The drop in exchange rate should at least stimulate our tradeable sector- manufacturing, exports, tourism, and so help employment, with a virtuous circle of then lower social welfare among other things.
Stephen,
Yes, less overseas borrowing will put less upward pressure on the exchange rate, so that it can fall to a level, which is appropriate to rebalancing our current account deficit.
In terms of your example, its not quite correct. Let's say the government had $2b worth of bonds maturing and normally they would roll them over, as they still needed to fund the deficit. In the MD case, they would not issue new bonds but print the money instead and spend it directly into circulation. Now according to calculations, that amount of money, in our current situation would be unlikely to cause any inflationary flow through ($5b would be about the maximum you could get away with).
However, if one wanted to keep the money supply stable (it has grown from $55b in 1992 to $240b in 2012), one could impose higher restrictions on bank lending (which is how the money supply is normally expanded), so you would have $2b less of bank credit. It wouldn't be that accurate in practice but that's a rough guide. The dialysis piece is making sure you suck out the "bad money" in order to keep the system stable. In practice small amounts of new money are not likely to have a major effect....some maybe used to pay down debt for example, as businesses tidy their balance sheets.
Our most pressing concern is how we are going to pay back our major overseas debt....we have to buy less, sell more or sell stuff we own. A lower exchange rate, lower public debt and vibrant economy are likley to help us towards that goal.
Heard a great saying today, relevant to this thread. "live by the printing press, die by the printing press".
If NZ starts printing money, politicians will never stop, the temtation will be too great. I cannot believe that any body can believe that printing money is a solution to poor economic management.
This country is living beyond its means, end or story, no esay way out. Do not under estimate how despirate politicians will become to gain or retain power in the face of collapsing economy.
With this theory of printing running rife owning hard assets with a view to inflation gaining hold in years to come will help to protect your wealth. http://j.mp/NmMU8D
Robo47,
With all due respect, you are leaping to conclusions. The term "printing money" tends to evoke a Pavlovian response in most, but if you read the proposal thoroughly, it should be clear that maintaining a stable money supply is key i.e. no excessive growth.
Taking control of our money supply is, indeed, part of the solution to years of poor economic management. This is no free lunch but more a rebalancing of how the money supply is constructed and how governments finance their spending. We still have many hard yards ahead in paying off our international debts.
Call a spade a spade. This isn't QE as we know it where the money goes to the banking sector to lend, its Public Credit where the new money is spent by the government directly into circulation minus any future interest. Calling it QE might make it more palatable to some but the "markets" will reject anything that is not bank centric.
Joseph Huber and James Robertson for the UK think tank New Economics Foundation explain how it would work without creating out of control inflation of letting the politicians go spending mad. Makes a lot of sense to me.
wtf,
Thanks for the above comments. Robertson and Huber's book is an excellent source of information and analysis. James Roberston has just published a new book called Future Money, which is a great piece of work. People like James Robertson and Bernard Lietaer have done sterling work in this area and should be taken very seriously, as they both have a deep history in this area.
I'd just like to be explicit about definitions here. I see public credit as the RB lending money directly to the government (as the First Labour Government requested in 1935). That is always an option. MD is an explicit injection of new currency into the real economy, whilst at the same time restricting bank credit on the other side of the ledger.
There are many options available in the monetary space. The most important issue is to make sure all are discussed thoroughly and objectively. In that process, a clearer understanding of how the monetary system actually works will, hopefully, occur.
At the moment, the authorities, for whatever reason (vested interests, ignorance, fear etc), are refusing to acknowledge this and are not engaging in a proper investigation. I think this is negligent of them, given their constitutional and legal roles to act in the best interests of those they represent.
"At the moment, the authorities, for whatever reason (vested interests, ignorance, fear etc), are refusing to acknowledge this and are not engaging in a proper investigation. I think this is negligent of them, given their constitutional and legal roles to act in the best interests of those they represent."
I suspect all of the above but different for each individual. In English's case I think its mostly entrenched ideas (via Treasury) and fear of the markets. In Key's case self interest and a deep committment to the established status quo that has served him well so far. For most politicians it is ignorance and the fear of moving too far away from safe boundaries that can be bad for your future prospects both inside and outside Parliament (No cruisey directorships or gongs for rebels)
wtf, i think your analysis is spot on. Supports my feelings that MPs should have a maximum of 3 terms in the house. Bill English is a prime example of an MP who has turned into a polycrat. He and others of his era, have been around far too long. It leads to entrenched thinking and a loss of touch with the world outside Parliament.
I'd agree with that. Treasury in particular but probably also MFAT have spawned several generations of bureaucrats and politicians with an ideologically homogenous view of the world, mutually reinforced right through government and into business as they leave to take up corporate directorships or diplomatic posts. Any doubts are quashed in the interests of future promotion or outside job opportunities. Any dissenters are quickly sidelined and their views ignored by the MSM so all we have ended up with are essentially variations of the same ideas from two different factions of the same ideology, Labour and National.
I know - lets call it "Social Credit". If you financial alchemists prevail we would needs must return to First Past the Post electorals as a safety so we could expunge from the political map politicians who used this funny money for evil. MMP just allows a List of Walking Dead.
Ergophobia
Ergophobia,
You may call it what you wish but it isn't "social credit". It's not financial alchemy either. Financial alchemy is practised by the banks when they create new credit. At least governments are creating sovereign coinage. Banks operate double entry bookkeeping. Banks create complex derivative products and sell them as investments. How to transform a sub-prime loan into a "AAA" rated investment....now that's what I call financial alchemy.
What's even funnier is that the people who tend to use the term "funny money" have little idea of how the money system actually works. They are simply repeating a term that has become imbued in social consciousness by those with a vested interest in making sure reform never happens. It's the easiest put down out there when talking about how money is created. However, it does not change the facts of the mechanisms involved. That doesn't mean to say this is not a very contestable space but there needs to be some basic understanding of the processes involved.
To paraphrase Daniel Moynihan, "You are entilted to you own opinions, but you are not entitled to your own facts".
"They are simply repeating a term that has become imbued in social consciousness by those with a vested interest in making sure reform never happens."
Any reform may become moot shortly with the signing of the TPP. We aren't allowed to know what's in it for 4 years after its signed but its safe to assume it wil lock in further financial deregulation and ease "investment" in New Zealand. The most controversial part of it is probably the corporate right to sue governments for legislative changes that they believe affect their businesses. Any kind of monetary reform proposed above would detrimentally affect bank cashflows and profits by crimping their lending and would open to litigation in the TPP's very "impartial" but again secret abitration tribunals.
wtf,
I agree this is an important issue. I talked about it in my submission on the MOM Bill but there wasn't much interest in it during the oral submission process. The interaction between international and domestic law has never been more complex or opaque. As we saw late last year, Philip Morris sued the Australian government over a breach of a bilateral investment treaty.
Expect more of that if the TPPA goes through. That's not to say investment treaties a re a bad thing but they often resemble a Faustian pact....seems great at the time but the devil is always lurking in the details.
As we have seen in Europe, loss of sovereignty means someone else controls your country. As we've seen with the Convention centre, politicians are always looking for a big deal, which looks good up front but carries long-term costs.
Monetary sovereignty is a key pillar of Parliamentary deomcracy. We shouldn't give it up that lightly.
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