Mayes on QE

October 11th, 2012 at 1:00 pm by David Farrar

Former Reserve Bank Chief Economist writes in the Herald:

Printing money is usually a last resort that seriously troubled countries use to stave off collapse, and not some mysterious trick that other nations have conjured up to achieve quick riches.

I never though a so called serious political party would advocate it, since Social Credit were killed off.

New Zealand has definitely not run out of opportunities to use conventional monetary and fiscal policy if it feels the economy faces a lack of demand. So why move to the unconventional now?

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy.

And our cash rate is 2.5%

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy. If the central bank then buys longer dated bonds or other financial securities (including commercial paper or mortgages from the private sector), it may continue stimulating the economy.

Evidence from a symposium being published by The Economic Journal suggests that this is achieving a little in the United Kingdom, the United States and the Euro area.

The problem is that it only works well if people fear major and rush out to buy before prices rise. Once growth re-establishes again, the central bank sells all assets and mops up the extra money before gets out of hand. That of course explains why it doesn’t really work. If is going to be headed off, then why buy now? Hence the weak effect.

Thus quantitative easing needs to be on a massive scale if it is to work.

And this is what worries me. The proposed printing $8 billion of money to stimulate the economy. Now what would they and Labour do, if that doesn’t work? Would they say it was a silly idea, or would they say the problem is they did not print enough money? They’ll then be printing another $10b, another $20b etc.

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20 Responses to “Mayes on QE”

  1. ross69 (3,637 comments) says:

    > Printing money is usually a last resort that seriously troubled countries use to stave off collapse

    So the UK, US, Japan, Switzerland et al are all on the brink of collapse?

    [DPF: Yes for three of them - their deficits are so high they can't cope]

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  2. Komata (971 comments) says:

    Re: ‘Would they say it was a silly idea.. . . ? Dear me no, you should know by now that if such a thing happens ‘It was all NATIONAL’S (or the ‘Tory’s’) fault for creating a situation which FORCED them to take such action’ (even when they actually didn’t – mustn’t let facts get in the way of a good lie)

    Socialists never, ever, take responsibility for anything that they do if it goes wrong.

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  3. Mark (1,301 comments) says:

    Ross,
    the answer to your question is quite probably. The GFC was far worse for all because their relative debt positions at the start of the GFC were so high. One of the saving graces for NZ is that Cullen did manage to keep the country’s debt within reason despite his colleagues chomping at the bit to spend more and more.

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  4. Mark (1,301 comments) says:

    Politicians never, ever, take responsibility for anything that they do if it goes wrong.

    There, fixed!

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  5. Ryan Sproull (6,661 comments) says:

    This is probably a good place to ask. Could any Kiwiblog commenters recommend me some good books or textbooks for getting a firm understanding of economics?

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  6. Bevan (3,965 comments) says:

    This is probably a good place to ask. Could any Kiwiblog commenters recommend me some good books or textbooks for getting a firm understanding of economics?

    If your looking for a good book to send to Russell, I suggest ‘Economics for Dummies’.

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  7. Flyingkiwi9 (54 comments) says:

    @Ryan -

    Take NCEA Level 2 Economics and you’ll be a cut above anyone from the left.

    NCEA Level 3 Economics and you’ll see the ACT party actually make a lot of sense.

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  8. RRM (8,988 comments) says:

    [ross69: So the UK, US, Japan, Switzerland et al are all on the brink of collapse?]

    [DPF: Yes for three of them - their deficits are so high they can't cope]

    I do recall when the Dompost reported on the first Key & English budget in 2009, they included a quote from one or the other of those gents about how a bit of belt tightening was going to be required to get through the GFC, but basically “NZ was on course to a position most developed counties would envy”…

    Fancy that, that turned out to be TRUE… who’d a thought it, eh Ross?

    I’m no National party cheerleader, and I’m certainly no economist, but Ross you have to admit it don’t you, that on this occasion it almost looks like a politician said something that was correct, forthright and honest and to the point.. :-P

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  9. Peter (1,468 comments) says:

    This is probably a good place to ask. Could any Kiwiblog commenters recommend me some good books or textbooks for getting a firm understanding of economics?

    This is a great place to start. It was a better read than the economics papers I took at University, and took a lot less time.

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  10. Grendel (873 comments) says:

    Ross is trying to show Japan as a good example? from memory of a seminar i was at that did a full global analysis (and it was late last year), if Japan keeps going the way it is, its going to hit 600% Debt to GDP, and its near 200% now(then). if they simply slow the increase they are looking at 3-400%.

    US, Greece, Spain, UK, France, all the same. Germany might be ok, cant remember if switzerland was mentioned.

    my numbers might be a bit off, but what i took from that is that parts of the world are fucked and japan is super fucked. funnily enough because most of its borrowing is domestic, so it has no outside lenders to simply default on, they are stuck with their debt. hmm which political parties get their knickers in a twist over foreign banks in NZ?

    good one ross, twit.

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  11. Mark (496 comments) says:

    If QE was the road to riches then why hasn’t QE1 and QE2 achieved anything in the US.

    The Federal Reserve bank have decide to do QE3 which is open-ended, however I dont think this will acheive anything either.

    The US has a spending problem, they need to balance thier budget which would require cutting spending, reform the tax code where they can lower their tax rates and abolish loop holes and fix their entitlement programs.

    Also a significant issue as to why the US is heading back into recession is that the government interferes too much in the marketplace rather than set the rules and leave the market alone.

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  12. tepopo (6 comments) says:

    Following the logic – if it is agreed that the exchange rate is too high, and that QE is only used as a last resort when interest rates are at or near zero, does that mean we are in for further interest rate cuts to at least help the export earnings

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  13. KiwiGreg (3,129 comments) says:

    @ tepopo No, or not for that reason. RBNZ’s only job is to manage inflation, not help exporters.

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  14. Halconero (6 comments) says:

    I’ve found this to be great economics 101

    http://www.2shared.com/document/wXXNAWqg/How_an_Economy_Grows_and_Why_I.html

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  15. Luc Hansen (4,573 comments) says:

    So the UK, US, Japan, Switzerland et al are all on the brink of collapse?

    [DPF: Yes for three of them - their deficits are so high they can't cope]

    This is simply not true.

    Neither the US nor Britain nor Japan have had a problem financing their deficits during this current crisis. In both cases, public debt is nowhere near an all time high and in both cases they operate a fiat currency regime, therefore they can never be insovent – their constraint is an inflationary constraint, and there is little danger of runaway inflation when all (and us) have a substantial output gap.

    In the US, its 16 trillion public debt is composed of about 5 billion inter-government borrowing, about 3 trillion owed to foreign govenments and the remainder is domestic borrowing. Curerently, investors are flooding money into the US Treasury at a negative real interest rate, it’s called in the trade a flight to safety. Surely, this is hardly the sign of a nation on the brink of collapse! The inter-government borrowing is mainly from the social security fund and all that needs to be done to replenish those coffers over time is to lift the ridiculously low cap on which the payroll tax (which funds social security) is paid.

    And in the case of Switzerland, it currently operates QE in an environment of its interest rate being above the zero lower bound to purely target the exchange rate and protect their export base.

    Switzerland is proof that while governments traditionally wait to hit the zero lower bound to introduce QE (mainly due to political contstaints imposed by the ignoranti), the zero lower bound is not a compulsory prerequisite for QE. That is the existence of an output gap which indicates a low propensity for inflation to suddenly take off.

    Eventually, as Mr Mayes points out, the process is reversed, but in the meantime, the economy has returned to better health and can be weaned off the medicine.

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  16. Luc Hansen (4,573 comments) says:

    No permission to edit. Sheesh!

    “In both cases” = US and UK, not sure about Japan.

    “5 billion” inter-governmental borrowing should be 5 trillion.

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  17. Fisiani (854 comments) says:

    We have an electortate that are thick enough to vote Green without knowing a single thing about their economic policy. We need to form an EnviroGreen party that focuses purely on environmental issues and could work with any leading party

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  18. Tom Jackson (2,235 comments) says:

    NCEA Level 3 Economics and you’ll see the ACT party actually make a lot of sense.

    Read the General Theory of Second Best and you’ll realise that they, and most economists, continually, radically and comically overstate the usefulness of the free market.

    Luc is right BTW.

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  19. EAD (315 comments) says:

    Luc – do you get you intellectual justification for QE from Paul Krugman by any chance? Why lefties like the Greens like policies such as “QE” (and fiat money in general) is that it inevitably turns the free market functions of money inside out. Instead of being a store of value, the currency becomes a point of plunder through monetary policies such as quantitative easing. Instead of greasing society as a medium of exchange, the currency acts as a powerful tool of social control. The second harm is far less frequently discussed than inflation, but it is devastating. The personal freedoms that we know as “civil liberties” rest upon sound money.

    In reality, economics is not the fiscal rocket-science it is made to sound. Capitalism itself is based on good old-fashioned honesty. The money at the heart of it must be both an honest store-of-value and an efficient medium of exchange. It ceases to be so when the inherent deceits of fractional reserve banking and a fiat currency allow trillions of false credit to be pumped into the system, thus forcing up prices (booms) which inevitably lead to over-valued commodities (busts).
    What happens next is that the banks, having privatised their gains in the good times, simply socialise their losses onto the tax-payer. It’s a crime. Simple as that really.

    Ryan – as an introductory book, I can’t recommend enough, Henry Hazlitt’s “Economics in one lesson”. If that piques your interest, I would then read Murray Rothbards “What has the government done to our money?”. You will never look at money the same again after reading that

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  20. tom hunter (4,004 comments) says:

    Luc – do you get you intellectual justification for QE from Paul Krugman ….?

    Heh, heh, heh. Why yes. Yes he does. However did you guess?

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