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Raf Manji says NZ shouldn't get sucked into overseas style QE or asset purchasing, and instead should directly support the real economy by funding infrastructure projects & increasing income support

Raf Manji says NZ shouldn't get sucked into overseas style QE or asset purchasing, and instead should directly support the real economy by funding infrastructure projects & increasing income support
The Govt should directly support the economy including through infrastructure projects.

By Raf Manji*

As New Zealand braces for the economic and financial impact of the Covid 19 (coronavirus) pandemic, the government is preparing a large-scale fiscal support package, to be announced on Tuesday.

This morning the Reserve Bank cut the OCR by 75 basis points to 0.25% and indicated it would stay there for 12 months at least. This was a surprising, though warranted move, considering it had been relatively sanguine about the possible effects in recent weeks. It also indicated the option of large-scale asset purchases of government bonds.

The Federal Reserve Bank of New York has, just as I write this, cut the Federal Funds rate to a range of zero to 0.25%, and announced further buybacks of Treasury securities and government-backed mortgage securities over the coming months of up to US$700 billion.

These policy announcements sound eerily similar to the actions post-Global Financial Crisis (GFC), when the term QE or quantitative easing came into common knowledge. Essentially, QE is the large-scale purchase of assets, usually government bonds but also of mortgage backed securities, by monetary authorities, using newly created money.  The purpose is to reduce the level of interest rate across the yield curve, in order to encourage new lending and reduce borrowing costs.

But to what end? The outcome government is looking for is to support businesses, whether from the perspective of the consumer, the investor or the producer. They want the economy to get back to ‘normal’, which in economic terms is around 2% per annum GDP growth.

So why not just put the money directly into those areas? Rather than going through the banking system, why not fund new projects directly, thus directly stimulating demand. In other words, massage the heart directly, rather than pump in some financial adrenaline.

I suggested this back in 2012, in an article entitled ‘Monetary Dialysis’ (published on June 4th 2012!), as a response to the global program of quantitative easing, which had seen asset prices soar, whilst the general economy remained sluggish. All that new money had passed from one financial node to another, eventually boosting the economy through the wealth effect, but not really dealing with underlying issues. This money go round had benefited those who owned financial assets, including housing, but hadn’t really dealt with many of the economic challenges. This included the desperate need for new infrastructure in many countries, particular regional development, the lack of, which in the US at least, delivered Donald Trump to the White House.

The most direct and sensible outcome is to direct new spending into the backlog of infrastructure projects, of which there are many. Just look at the state of the pipes in Wellington and Auckland. There is a long list of projects waiting for funding in local government, especially in regional areas. This is the time to boost our domestic industries, the ones we may look to now to provide basic support: energy, food, water, and housing. We can use this opportunity to build our self-sufficiency, climate change adaptation and mitigation. There is also the pressing need for an increase in core benefits, as identified by the Welfare Working Group, and studiously ignored by the current government.

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Directly injecting money into these areas will have an immediate effect, without the risk of missing the target through a QE style bazooka approach. The only limit to the amounts is the inflation rate and capacity in the economy. Both look to have plenty of headroom for the next 12-18 months at least. Whether the Reserve Bank funds this through purchasing government bonds, or directly credits the Treasury account, this new money must go directly into the economy, and not slosh about the banking system hoping for a pick up in new borrowing, at a time when the economy is contracting and businesses will be risk averse.

New Zealand should not get sucked into the type of QE we have seen overseas, which tends to favour asset price inflation, support zombie banks, and have only a marginal affect on the real economy. Now is the time for the Government to directly support the real economy, with funding for a targeted pipeline of infrastructure projects and increased income support, and a clear GDP target.

This crisis is also an opportunity. Let’s not waste it.

*Raf Manji is a strategy and risk consultant.

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The issue with infrastructure seems to be that each new government changes its mind and, consequently, there appear to few that are actually ready to begin or accelerate.

Agreed on supporting consumers over conventional QE or bailouts however.

The incumbents have actively been on the lookout for reasons not to invest in big-ticket infrastructure projects from the day they swore in and behold: they may have now found the perfect one.

To be clear, I am not taking sides since, in all fairness, the opposition is in outright denial of the very need of an infrastructure overhaul in NZ.

We will be triaging infrastrucure, big-time, if not now then in the near term.

Which makes the suggestion a nonsense. I sense PR in this

Biggest problem here is our political cycle is far too short. 3 years doesn't usually allow governments to even see the start of a project they kicked off in year 1.

This is why China's infrastructure is now world-class. Their government expects to be in power forever, so they plan infrastructure out 5, 10, 20, even 50 years out.

The miserable part of our system is that we also generally get the same government for 3 terms, 9 years. At the end of their 3 terms, they realise "if only we had kicked off that big infrastructure project back when we started...". The 9 years in power means we have at least one pointless election. We should dramatically increase our election cycle to 5 years. It wouldn't change anything except make our leadership more forward thinking about infrastructure and policy. At least they might plan for 10 years in power, at the moment they only govern for about 2 years before heading into another election cycle - far too short of a time to concern themselves with big, complex infrastructure projects.

QE, yes, but not to banks. They should give to people directly.

Yes , then they can give it to the banks!

For what ? 0% return ? They will spend it or use some to pay off debt.

QE in the US has failed to do anything but prop up broken financial institutions. Better to prop up the people that a merchant bank or hedge fund that has loaded up on both margin and options with unlimited downside.

The Fed's unofficial repo bailout since September has poured in hundreds of billions without any result other than continued existence. There are suspicions about collateral being correctly price down (corporate bonds apparently) and this is the source of a number of liquidity problems.

Better to pour money into functioning parts of the economy like people with mouths to feed and bills to pay. No point compounding this into a humanitarian crisis too.

Well said. Do you think the US economy crashing despite this generous cash handout to the financial markets will trigger the great reset?

For the great reset political change is needed. If the Fed keeps pumping until something explodes who knows what direction this could take. There's speculation that part of the bailout money is helping the EU maintain payments of USD denominated debt. We could get caught by an EU financial meltdown instead of the US, and many other dark trades could go with it.

I think things will get bad enough that political change to the global financial system rather than a complete meltdown, but as this year has shown anything could happen now.

My money is on you getting your wish. We've already seen the planned infrastructure spend up announcement, to my mind the next intervention must be direct income support and/or a mortgage holiday.

hard to pay your mortgage if you lose your job, then you become dependent on income support, like a heroin addict.

'The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a "crack-up boom" and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.'

Just announced in Canada;

That's why a mortgage holiday is on the cards + income support to keep food on the table. Yes, depression-style initiatives.

can you really get kids to stay at home?

In the past no but today it is almost impossible to get them out doors. I suspect you live in one of those delightful rural areas of NZ which is 10 years behind Auckland. Let me know if you want to swap homesteads.

Usually folk suggest all it takes is an X-Box and an iPad to prevent kids leaving the house.

I truly hope we do not close the schools, nor attempt to confine children. I'd rather we focus on socially distancing our elderly - for example, no rest homes visits by relatives (say review on a fortnightly basis), provide in-house connectivity via Skype/Messenger and staff tested daily before starting a shift. Sounds draconian, but we need to distance the vulnerable in society, not the healthy. Keep the healthy living as normal a life as possible. MTCW... for what it's worth :-).

Exactly, and most retirement villages/rest homes already have implemented such policies, including self-isolation for both staff and residents that may have had contact with overseas relatives, and this was prior to anything the Govt. had initiated.

I would say that probably the most effective stimulus would be a debt jubilee on up to date student loans.
Whether or not that is being mooted, I am unsure. But I would be all for it.
An immediate and long term stimulus for those who are going to produce and consume us out of this.

However, I fear instead the majority of the benefits of the stimulus will accrue to those who don't require it.

"produce and consume us out of this...

LOL .. clearly you don't understand the depth of the problem
Are you suggesting a few ex scarfies can order in some more pizzas to bring us through?

Don't laugh.
Those scarfies may invest that capital in a productive new method for building echo chambers which would benefit you and PDK directly.

Keep going... there'll be a page in your textbook somewhere that explains everything

All for it too! It's a balance sheet transaction that isn't likely to make much difference to our dollar to my mind. And it would be a nice one to be first-in-the-world on.

Yes they have gone with a mortgage holiday in Italy also.


I will be outraged if the Tourist Industry gets a large transfusion of cash. It has made out like bandits for 10 years. Air New Zealand has ruthlessly sucked the local domestic market dry with fares of $700 Auckland to Invercargill or $700 from Dunedin to Nelson, while it has been cheaper to fly to Australia or the Islands. The industry itself should have put aside some of its super profits for a rainy day. Meanwhile private jets are queuing up at Queenstown Airport. Talking about rainy days look at the Australian NRL paying league players $1 million annual salaries and now crying poormouth to the Government to pump in salvage cash

Absolutely agree - any industry that has been paying staff (be it sports stars or bank) outrageous wages (which to me is $1m+) has got it wrong in the good times and needs to suffer the loss and learn their lesson. If the small guy is going to suffer, so should the big guy.

Nice thinking in the abstract and in that sense I have some sympathy.
But we are talking about real people with real lives here.
Even if we put their livelihoods to one side, mass unemployment would get ugly for us all in terms of crime and social issues.

While importing cheap, exploitable labour on whose back to make a lot of money too.

The tourist industry is one that has options.
Kiwi's wont be travelling overseas - so focus on the local market chaps. Tempt me to Queenstown with a super duper ski package.
It's an industry that should be netted of with overseas tourist spending... but seldom is.

Icon- so how will you feel when farmers who might be sitting on assets worth 10s of millions start to queue up?

Infrastructure spending on motorways should be a priority. This virus has proven public transport isn't such a good idea. People are not meant to live like sardines in apartments and travel together in public germ tubes.

Another initiative would be to fast-track, and lower the requirements for, construction-related skills. I've operated most types of heavy machinery successfully (from harvesters to excavators through graders, dozers, scrapers and trucks) with a half-hour go-through of the controls and a graduated entry into actual work over a week or so. No certificates, trained instructors, institutions, or bureaucracy. Mentors (old, grizzled operators) mostly. Real skills result (especially the muscle memory needed for e.g. excavators) and are of lasting value to the worker and benefit to the economy. And don't get me started on house builds, where a 19th century carpenter, after a goggle-eyed introduction to power tools, would be immediately productive.

I knew it. Waymad, an old grizzled mentor.

How does barista muscle memory on a coffee machine translate to a dozer, must be pretty close.

too obvious I know but maybe hospitals,we need a few new ones instead of patching up the old ones.

Yes I agree Raf. Let's do this.

"this crisis is an opportunity"

Capitalism is officially bust. 0% interest? hello?
There is no opportunity here but take the medicine
There is a paradigm shift coming … and it doesn't involve energy sinks called cities
We need MORE infrastructure ? … when we couldnt even afford the maintenance of the stuff we've got during the good times when the credit card wasn't maxed out ??…

"The only limit to the amounts is the inflation rate and capacity in the economy.."

How about Oil? Parts? Materials?
Or viable consumers?
Or resources without a viable supply chain?
Or resources without a functional international economic system?

No no you've got it all wrong.

Nymad has this whole new way of making stuff up out of nothing.
Or a stuff-up out of something.
Or something.

Well okay, that might have been a bit 'relentlessly positive' in expression, but I do think that we have an opportunity to show maturity and compassion, a heightened sense of community if you will, during this type of crisis.

If we must triage, as pdk and you suggest, let's focus our energy on how we can best triage. Perhaps all that money recently announced to go into infrastructure will initially find its way into fixing/upgrading existing infrastructure, rather than building future-new. Perhaps we really will learn the practical meaning of decarbonisation... and that can't be a bad thing?


Very late for maturity and community I'm afraid...
The window for choices is long gone
The lifestyle you know is gone, incomes are gone
Debt is collapsing ... we aren't short of money, we can longer game the system to keep supply chains ticking
We cant undo overshoot so collapse is a matter of how soon
This ain't no triage holiday before some new norm
Picture supplies dring up on shelves indefinitely, no bank accounts, and then ponder community

For continuation we need to maintain and increase consumption of all sorts... events, sports, travel, mindless shopping... this debt is our income!..which means we need viable consumers

We are out of viable consumers

Govt relief packages are simply food tokens in comparison...

QE IIII has arrived. Corona Rules.
The reigning QE II may abdicate soon ?

Corona does mean "crown" in Spanish, so maybe an apt analogy? QE IIII wearing a corona?

You made my date, mate. Thanks.

question:' "So why not just put the money directly into those areas? Rather than going through the banking system, why not fund new projects directly, thus directly stimulating demand. In other words, massage the heart directly, rather than pump in some financial adrenaline."
Answer: so the business that should, and allow a newer resilient and more robust to suit the times that will stay around and serve for longer, fail will not fail.


Excellent article - reminds me of journalism !

NZ came through the GFC in far better shape than virtually any other developed economy -- largely because it resisted the race to the bottom -- the desire to print print print and as a result we have dept to GDP ratios of about 22% not 122% as many other nations have.

Goods also became way cheaper -- as the $ grew stronger from this strategy -- and yes - we could have used a looseness of the purse strings earlier and more investment from 2015 onwards -- but the Nats paid for that at the election.

For all the talk about a lower $ - you cant really say that our exporters made out badly - as sector after sector - wine, kiwifruit, fruit, hit record levels year on year.

So lets not print -- but by all means borrow at virtually 0% and put all those out of work into building infrastructure -- a serious rail network for goods and services - not just passengers - improving road safety - upgrading hospitals and schools -- and a National Research and innovation center to make the world envious

how does NZ function if the rest of the world isn't?

Guess we try to rely on the fact that we're very small and there's enough of the world to buy off us?

Economies to scale and overshoot dont work like that... there is no nice unwind

I must be stupid...but how does playing around with numbers on a computer make any god damn difference?

They talk about stimulus as if there is a secret source of wealth to tap.

You want GOD ?

A kindergarten teacher is observing her classroom full of children while they are drawing. She occasionally walks around to see each child's work. As she gets to one little girl who is working diligently, she asks what the drawing is.

The girl replies, "I'm drawing God."

The teacher pauses and says, "But no one knows what God looks like."

Without missing a beat or looking up from her drawing, the girl replies, "They will in a minute."

This is wrong!
The government SHOULD NOT inject more into infrastructure spending. That has a long lag time, and is not going to address the crisis right before us.
The focus needs to go into the sectors that are going to be devastated in the short to medium term.

Let me guess - Tourism? Your son will be fine stop being a helicopter parent!

Where do we start and stop? Tourism, hospitality and retail. Many other related areas will be hit to some extent.
A spend up on infrastructure at this stage is bullshit.
1. It will take many many months if not years for such projects to get off the ground
2. There's no way people in the areas hit hardest will be able to redeploy into infrastructure projects, or at least not within 1-2 years.

This is the stupidest idea I have heard all year (noting there has been a massive underspend on infrastructure for many years. But that's a separate matter)

Completely agree. Keeps that sector working and gets important projects completed. This is a form of stimulus with long term benefit. Projects of national importance - fire them up.

Yes, now's the time to address our basket-case infrastructure once and for all:
The Government should pay out Fletchers for that fiasco at Ihumateo and let them get on with utilizing their structural expertise in building up our neglected infrastructure while money is ridiculously cheap.


Absolutely spend on infrastructure. It’s what happened after the Great Depression. Roads, housing, water pipes, power generation, etc etc etc And BTW investment in the real economy is what creates real wealth....not tourism and service economy. And it starts on day one. Spending on labour etc etc etc.

Mortagages. There is a facility in the legislation now for hardship. Like in WW2 maybe banks will have to freeze borrowing to all but the productive sector. And repayments and interest charges frozen as well.

We bailed out the banks in 2008. In 2020 entire industries will be.

Central Banks around the globe are coordinating global takeover, They want to be the lender and buyer of last resort and own the entire planet. The treasury in America said the markets and banks will get unlimited funds. Reserve ratios in US banks have been removed. Our reserve bank said buybacks and stimulus are in order.

They want the lot. Welcome to the NWO people. We have been disarmed and the deposit insurance scheme never got passed. Entire industries like the airlines and cruise industries will be bailed out and we will pay for it.

Jacinda will say its about kindness. Supported by the morning breakfast shows as heroic. All while bail in will occur. Nz died today and freedom.

'We' only have one airline and no cruise ship industry (just cruise ship arrivals).

So I think the vast majority of support to NZ businesses will be aimed at SMEs, likely by way of tax deferment/relief. And the balance will go to those losing their jobs, or facing reduced income. That's my hope anyway.

Perhaps a deposit guarantee scheme will be passed under urgency - it should be.

How about massive social housing? - nationwide as part of major infrastructure items.
But it's a tough call, after all all those 'QE overseas style' it's actually spread across by most of 'NZ banks'- And I don't think they're in the business of absorbing any losses, they job to pass it on to the consumer.. slow drip... QE I,II,III,... worldwide herd/cartel mentality.

I would be keen on more investment in social housing...

So does the infrastructure go more into global logistics, compact cities, and PT to get that density up so future viruses can spread more easily, or does it go into more resilient regional communities and local support industries?