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Have your say: Will NZ be forced to revert to quantitative easing (printing money)?
April 17th, 2009
Should New Zealand start printing money?
Westpac put out a bulletin on Friday on the topic of quantitative easing (aka printing money, or QE), discussing whether New Zealand was likely to end up going down the same path as the US, UK and Japan by turning to what many view as the last resort of monetary policy.
Westpac economists Brendan O’Donovan and Sharon Zollner argued that it was not likely that the Reserve Bank would have to resort to QE, unlike its larger central bank counterparts.
They held that the Bank’s conventional monetary policy tools still had room to be effective, and its “more traditional tools and channels for monetary policy are likely to keep working longer than in many other countries.”
They gave three reasons why:
New Zealand is less likely than the US or UK to run out of traditional monetary policy ammunition for three reasons. Firstly, our neutral interest rate is relatively high, due to being a small, far-flung, seriously indebted nation. The Reserve Bank can therefore cut rates much further below “neutral” than in other countries. Eyes light up here at borrowing rates under 6%, whereas in larger rich economies such rates are the norm.
Secondly, interest rate cuts have been largely passed through into the most popular retail mortgage rates, thanks to our solid banking system. In contrast, the central banks in the US and UK (where their banking systems became dysfunctional) have struggled to get traction despite equally large cuts in the
overnight cash rate.The NZ housing market is already showing some signs of responding to the historically low mortgage rates now on offer, with housing sales well off their lows. And importantly for consumption going forward, the mortgage debt servicing burden of NZ households has come off considerably over the past 6 months and will continue to do so as more mortgages roll off onto lower interest rates. There is therefore still a considerable amount of stimulus from monetary policy easing in the pipeline.”
Thirdly, we are a very open economy with a floating exchange rate that tends to get trashed when bad things happen. A sharply lower currency facilitates the necessary economic adjustment away from spending towards saving, and from consuming to exporting. It cushions the fall in commodity prices that inevitably accompanies a slow-down in world growth. While the Reserve Bank cannot set the exchange rate, and can influence it only at the margin through intervention, the NZD generally tends to move in the right direction to reinforce the thrust of monetary policy.
This puts us in a much better position than the likes of Japan, whose currency has strengthened sharply even as their exporters choke (Japanese export values in February were half those of a year earlier).
However, the Westpac economists did not go as far as saying these reasons provided certainties that New Zealand would be able to avoid QE, with few signs that the economic situation was improving.
It is therefore less likely that New Zealand will end up going down the QE track. But never say never – we are already a year into this recession and there are few signs of things improving. Interest rates and the exchange rate are currently defying the Reserve Bank’s wishes by tightening. And it is far from clear that the interest rate premium NZ has to pay to raise funds offshore in this environment has peaked. The RBNZ may yet find itself fertilising the money tree.
Given the dramatic increase in bond issuance that the Treasury is forecasting over the coming years, it would be very convenient for the Government if the RBNZ were to absorb some of it through QE. But under the Reserve Bank Act the RBNZ has operational independence in how it conducts monetary policy to meet the inflation target, and could therefore (ostensibly) not be pressured into helping out on this front.
What are your views?
Will New Zealand end up jumping on the central bank bandwagon?
How bad would things have to get in New Zealand before the Reserve Bank starts quantitative easing?
Thoughts and comments below please.
Tags: Alan Bollard, Brendan O'Donovan, conventional monetary policy tools, printing money, Quantitative easing, Recession, Reserve Bank of New Zealand, Sharon Zollner, US Fed, Westpac
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April 17th, 2009 at 5:30 pm
The fact that it even being discussed is of grave concern.
Unless we wish to end up like Zimbabwe – we shouldn’t even think of this as a perceived ” solution ‘ to I don’t know what.
This is about as loopey an idea we have heard since Muldoon was in power
April 17th, 2009 at 5:56 pm
Banks have been creaqting credit out of thin air for years I don’t see much difference to them printing it need to get back to to countroling spending our private dept has made us very vulnerable and made our land fills bigger To much money got us where we are today. The productive sector gets hammered while New Zealand spends up large I don’t think the recession has even warmed up yet
April 17th, 2009 at 6:13 pm
NZ has been engaging in QE for years – it’s just no-one has identified it as such.
April 17th, 2009 at 6:46 pm
In support of the previous comments.
April 17th, 2009 at 8:20 pm
PostDiaspora Says:
“NZ has been engaging in QE for years – it’s just no-one has identified it as such.”
Spot on! Not many associate rising house values with inflation or money creation, we like to think its our wise investment decisions. Now any solution is overhung with a massive unpayable housing debt, we’ve paid too much money for houses, with too much debt that our incomes are not sufficient to ever repay.
We either have to get super educated and invent leading edge things that the world will pay to get, and hence raise our wage level or completely crash the property market and default on our overseas debt. Get our wages down to our education, productivity and innovation level so we can compete with our Asian free trade partners.
We have to destroy this fools paradise mentality or we will be eternal debt slaves:
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10566248
If these two are representative of our future then NZ has wasted a couple of generations.
April 17th, 2009 at 11:55 pm
yep – and look closely at the introduction of interest free student loans. Sold to the public as a way to keep young talent in the country yet in reality the government was just propping up a flailing tertiary ed system that was suffering from an overvalued Kiwi $ (and no overseas students to put high fee paying bums on seats). Of course the new government will be forced to do a u-turn on the interest free deal. Debt will increase. Reality bites.
April 18th, 2009 at 1:08 am
Westpac is being very optimistic (no doubt due to their vested interest) on the housing market.
QE as a form of stimulus should never be an option. It should only ever be used as a form of last resort but then what lender is going to be demanding payment in NZ dollars anyway.
Time for us to make our way back up the OECD ladder. We’re going to be going rapidly backwards in absolute terms but with all the socialist governments around the world we’re lookeing liek the relatively good ones. They should look how much damage a Socialist government did in a boom time here imagine what theyll do in US/UK/Aus/etc.
April 18th, 2009 at 7:24 am
It would be a seriously dumb thing to do.
John B is quite right,
“The fact that it even being discussed is of grave concern”
Grave enough to have me shift the rest of my savings out of NZ as fast as I can and into commodity stock in Australia.
Bollard will have to put an end to this growing fear or the Kiwi will chase Mugabages rubbish currency into the gutter.
April 18th, 2009 at 8:51 am
Firing up the printing press is a ‘last resort’
As commented yr or so ago in these blogs, NZ with it high interest rate has at the start and still has a lot of room to manoeuvre, plus the RB has not panicked in spite of many self interested commentators , and as Bush did.
No matter what happens, the markets will rectify to correct levels, all the money printing , manoeuvring will not stop that, but only slow or possibly hold at above rectification levels artificially at the expense on long term benefits
The NZ US dollar is still a little high when compared to long term corrected levels, seeing a drop in these back a little below long term levels (high 40s /52 will increase productivity/exports, decrease imports on consumer spending , increase savings, then bounce back to corrected long term mid 50s.
We MAY need to print money toward the end of the crisis, to make final MINOR adjustments, but i see this as and adjustment rather than a necessity cause we are backed into a cnr like so many other countries.
NZ will see some hardship, but not on the scale of most of the rest of the world
NZ like other counties will have a slow FULL recovery of many yrs, (after all to think any country is going to recover from a crisis of this magnitude overnight is dreaming) but our recovery will be shorter and faster than the rest of the world.
Over all I do feel quite positive about the long term recovery (after the bottom is reached) of NZ.
April 18th, 2009 at 10:01 am
“The fact that it even being discussed is of grave concern” – yes I agree….a huge worry.
Maybe this means that finally they can see we are really in the poo and its a deep pile….however if everyone else is QEing then I wonder if printing $ will really work…
For myself I think its trying to hold off the inevitable, we have lived like kings/fools, now we pay for it….its going to take a decade I think, and during that time there has to be a huge re-organisation of how we do things…(finance, consumerism etc etc) We will come out changed from this, service and consumer industries will be decimated. We might have to live with a high structural un-employment and most of us are going to have far more basic and mundane lifestyles. I dont think the easy credit will ever return so the books will have to be balanced….
regards
April 18th, 2009 at 10:54 am
I just wish, given we’re seemingly stuck with that most un-capitalist of big government institutions, the Reserve Bank, they would have at least two Austrians on the board at any one time to balance out all the Keynesian BS.
In the meantime, yes, lets solve the collapse of this bubble by creating yet another bubble, a bigger one no doubt, to take what is left of savings away, or the future of the next generation having destroyed much of the last – hyper [monetary] inflation around the globe by two years?
Socialists, Big Statists, it seems, are sworn to just continue the same old mistakes : I wish I knew what the circuit breaker was. Well no, I know what it is, laissez-faire, but oh how to get there.
April 18th, 2009 at 11:16 am
“Things” don’t look good;
Here is a summary of the OECD report;
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10567229&pnum=2
April 18th, 2009 at 12:17 pm
Agree with everyone else, it is THE last thing that NZ would want to do. Countries that can survive this crisis with the minimum of borrowing to try to fund stimulus packages etc, and avoid money printing, are obviously the ones that will come out the stronger.
However, that’s if you have options – yes NZ has some advantages going into this crisis; it sells the basics (i.e. food) and it has a strong banking system still lending. But we do have some vulnerabilities notably large private debt, and as a consequence, a reliance upon the banks being able to continue to fund themselves/ourselves which, other than very short-term financing, is a huge struggle for them at present.
But what happens if many other countries start engaging in money printing and it starts negatively impacting their currencies, most particularly the USD ? what if our currency rises to uncomfortable levels killing exports ? The RBNZ cuts from 3% down to 2%, then 1%, then 0%, what’s left when everyone else is printing money ? maybe printing money ? – pray it doesn’t get to that
April 18th, 2009 at 3:21 pm
Playing devil’s advocate here, how healthy do you think the banks would look if property values deflate to say roughly half of what they are now? And then start to think about the commercial property market/values, and if you apply that thinking to the banks’ asset values which back their lending, it doesn’t look good here in NZ either, no matter what we export and earn from it…
April 18th, 2009 at 4:19 pm
ctnz (et al) – given your point, and I didn’t notice your handle(s) in the discussion that formed on this article, you might find it of interest:
http://www.interest.co.nz/ratesblog/index.php/2009/04/02/banks-attacked-for-profit-gouging-and-misleading-farmers-on-guarantee-costs/
April 19th, 2009 at 12:22 pm
Les,
Thanks for the pointer to the thread, I have seen it.
Steven,
I tend to agree with you, there’s only one thing left to do, try to figure out who will be left standing a little taller than the rest of the countries in this currency devaluation wave to come. And maybe have some of your capital left at the end, in order to start a humble productive enterprise at that point in time when it makes sense again. It doesn’t right now to me, and I expect to wait for at least another 2-3 years before the real opportunity arrives to start up a new and productive business.
April 19th, 2009 at 7:53 pm
Be aware that all the bailout money at present is little more than the future taxes of nations being pledged for generations to come for more central bank network created credit to be paid back at compounding interest at sometime in the future. This money/credit is being used for the quantitative leveraging to repair the plundered balance sheets and reserves of the banking system, but at the same time the credit taps remain turned off to the Real Sector in what is a Quantitative deleveraging, in plain terms the basically decent majority of the world are once again paying the reparation for the crimes of the elite and suffering the losses.
April 20th, 2009 at 1:42 am
Ian, I agree with most of your posts.
Bit like trying to blow up a balloon and hope no one sees the hole.
I think the hard part is the realisation for people to understand is that it is GONE and there is nothing left but debt. There is’nt anything going to magically appear to replace the old bubble…
The money appeared out of thin air and disappears into thin air.
I’d guestimate this worthless paper money at 80% and 20% on buying/selling real products and services.
This is the real dilema as no one knows how big the paper economy actually is…Its all creative accounting…..
If we went back to basic economics (real) and bought and sold things that are Tangiable it would more than likely take 5o yrs to pay back.
For the life of me I can not understand why NZ does’nt peg its $ to a basket of currencies or even better to commodities…Get rid of all this mal aligned speculation once and for all. Really how productive is that….
Bugger all these FTA popping up left right and centre too…
Lets get back to basics.
A sack of spuds is worth a sack of spuds…Who cares what the Rest of the world thinks…All things considered we have a high overseas debt per capita but nothing like US, UK and Euro area who are heavily weighted in the financial markets…
Where’s Jane Kelsey when you need her..??
April 20th, 2009 at 6:58 am
Looks like the Libertarianz brigade are moving in….death of a blog….
April 20th, 2009 at 7:04 am
Of course none of the ideas outlined in the link below would even begin to register as QE in Kiwi consciousness would they?
http://www.stuff.co.nz/national/politics/2345676/First-homes-kick-start
God, I cannot believe the government would seriously consider propping up the housing market with interest free loans to 1st home buyers (so they can get over the deposit issue). How cruel, sacrificial and irresponsible could you be? I am beginning to think Keys has retired into NZ, and to solve the problem of boredom is playing ‘Risk’ with the future of the country. I am regretting voting for him. As chief, he is now making a play for all the goats and all the women by crippling the future with debt. The sooner NZ’ers get over the idea that ‘it’s different there’ the more chance the country has of surviving. Iain you are so right.
April 20th, 2009 at 10:29 am
PostDiaspora:
The housing market is the key, if it drops another 25-30% the banks are going to pretty much be under water and the game changes dramatically. Nearly every cent that has been loaned out over the last 25 years is supported by rising house values, in a sense we have been on a housing standard.The govt are going to protect housing otherwise the banks are finished.
Strangely, who bails the NZ banks out since they are mainly OZ owned? If the NZ banks fail, is their exposure to NZ enough to pull their OZ parents under. Maybe NZ doesn’t have a problem…good ole Australia does…. and we become the 9th state.