The flooding of capital markets with massive new money from the RBNZ's quantitative easing program calls for a fuller debate of what the central bank and the Minister of Finance are trying to achieve, says Keith Woodford

The flooding of capital markets with massive new money from the RBNZ's quantitative easing program calls for a fuller debate of what the central bank and the Minister of Finance are trying to achieve, says Keith Woodford

Quantitative easing occurs when Governments create new money through Central Bank operations. Until recently, quantitative easing was called ‘unconventional monetary policy’. Nevertheless, many countries have used it in the past, particularly following the GFC.

Quantitative easing has now shifted to become mainstream as the dominant monetary response to COVID-19 economic conditions. It has also led to capital markets being flooded with money searching for a home.

As a monetary policy, quantitative easing is an obvious way to increase inflation to meet inflation targets. It is also intended to be an economic growth stimulant. Further, it can provide a funding solution for government financial deficits. Of course, lunch seldom comes free.

The impact of quantitative easing on retail interest rates has been powerful across the globe. Those interest rates have crashed. Its longer-term impact on citizen behaviours is only starting to unfold. The consequential impacts may not align with what is either hoped for or expected.

Here in New Zealand we were somewhat slow to undertake substantial quantitative easing compared to either Europe or the USA. Right now, we are making up for that big time!

Current guidance from the Reserve Bank is for $60 billion of quantitative easing via its large-scale asset purchase (LSAP) program for the year through to 31 March 2021.  This is the base amount, with lending and credit multipliers further increasing the money supply.

The Reserve Bank is explicit that the goal is to keep driving interest rates down. And it will surely achieve this if it sticks to the planned level of quantitative easing. The resultant flood of capital looking for an investment home is unique in New Zealand’s history.

Many years ago, quantitative easing by another name was known here in New Zealand as the key economic policy behind the Social Credit political party. It was widely referred to, somewhat derisively, as ‘funny money’. The notion was that the Government should print as much money as required to get everyone into jobs and solve unemployment. The aim was to ensure demand for goods increased to balance the supposed capacity of the economy to produce those goods.

The Social Credit philosophies first came to life in Britain but then took root in Canada, New Zealand and elsewhere, albeit always at the fringes within developed Western economies. In some developing countries things went to extreme, although not necessarily under that name – think Argentina and Zimbabwe. In those countries it became unconstrained money printing.

The philosophy of quantitative easing has come back into vogue as Modern Monetary Theory (MMT). The concept is that governments can fund part of their spending deficits by creating money rather than borrowing it from private citizens and institutions.  COVID-19 has now brought MMT from the sidelines to the centre.

The ‘free lunch’ limit to quantitative easing, under whatever title it chooses, is that it can only stimulate economic growth if there are unutilised resources available in the economy. In that environment it can have a role. Otherwise it has to be inflationary. Whether that inflation plays out predominantly as asset inflation or as inflation of goods and services will depend on how citizen and corporate behaviours. In an open economy with inflation, there must also be a consequential impact on foreign exchange rates.

Right now, there can be little doubt that across much of the world there are unutilised resources of labour. A big question is the extent to which putting more money into the economy can solve that problem. If it doesn’t get people back into work, then the conditions are ripe for stagflation.

In the global depression that is now upon us, it is not particularly helpful to think of quantitative easing as being either right or wrong.  Rather, it is a case of how much is appropriate to the unique global conditions. Also, the amount of quantitative easing that is appropriate in New Zealand, which is weathering the COVID storm so much better than most either Europe or the US, should be less than what is needed in those other countries.

Traditional economic theory says that lowering interest rates will lead to increased investment. Economists can argue convincingly that there is lots of empirical evidence to support that theory. However, that evidence comes from history and right now we are making a new history that is different from the past.

Despite the low interest rates, it seems that both here in New Zealand and almost everywhere else in the world, businesses have little wish to invest. As for consumers, they are choosing to save money rather than spend it, once again reflecting the huge uncertainties ahead.

With interest rates continuing to drop, the cost of mortgage servicing is declining. Mortgagees who have new spending options are either repaying principal, investing in Sharesies or similar, or simply building their savings at the bank.

Older people who rely on now-declining interest from fixed deposits to supplement their pensions are also having to give thought to changing their spending behaviours and spending less.

It really does not matter how much lower interest rates decline from here, it seems unlikely that investment spending will increase. It is other factors, not interest rates, that are controlling investment decisions. And there lies the nub of the issue.

Given all of these things, consideration needs to be given as to whether the Reserve Bank, currently going hell for leather for more and more quantitative easing, has got the wrong end of the stick.

Government has other options for the financing of its burgeoning deficits alongside the use of quantitative easing. The Treasury can still issue bonds – this week it has issued another $7 billion. The key issue is the extent to which the Reserve Bank soaks up those bonds or leaves them in the hands of the market.  

Essentially there are two separate entities of the Government pushing the economic levers. There is the Treasury under the control of the Minister of Finance who authorises the Treasury to fund Government deficits through issue of Treasury bonds. Then there is the Reserve Bank that can choose to buy those bonds through a policy of quantitative easing, using money newly created by the bank itself. The final net outcome is balancing entries in various electronic books of account, and new money has been created in the greater system.  Yes, you really can create money out of thin air!

Despite the so-called independence of the Reserve Bank, in practice everything is co-ordinated.  Part of the charade is that the Reserve Bank only buys and sells from secondary markets with non-government financial institutions.

The financial institutions are effectively acting as intermediaries between the Treasury and the Reserve Bank. In the process, the institutions can and do clip the ticket. The institutions can do their intermediation and hence ticket clipping in confidence because the Reserve Bank announces in advance its overall buying strategy for secondary markets.

I have no problem with the transparency demonstrated by the Reserve Bank in signalling its intentions, albeit within an overall charade between the Treasury and the Reserve Bank. The important issue is the extent of the quantitative easing and where it is heading.

If the Reserve Bank undertook less money creation and hence less quantitative easing, then those Treasury bonds would be purchased and held by financial institutions. That would soak up much of the deposit funds currently sloshing around looking for a home.

The economic notion that lowering interest rates leads to inflation, which then stimulates real growth in the economy, which in turn reduces unemployment, goes back a long way and seems to remain a ‘lock-in’ of mainstream economic theory. However, to borrow from a supposed statement of economist John Maynard Keynes: ‘When the facts change, I change. What do you do Sir?’. 

The empirics of the mainstream theory are very much based on specific citizen and corporate behaviours. Right now, we are in uncharted territory and that includes behaviours.

In New Zealand, the Reserve Bank is required by the Government to act so as to try and maintain inflation between 1% and 3%, and aiming broadly for the mid-point of 2%. There is a second objective of limiting unemployment and the attempt to do so might well take inflation beyond 3%.

In the current environment, it is this overarching guidance from Government, combined with the Reserve Bank’s reading of the tea leaves as to future unemployment, that leads the Reserve Bank into massive quantitative easing.

What we now need is renewed debate as to whether inflation targeting of around 2%, which has been fundamental to New Zealand’s economic policies, is necessary. What is so wrong with allowing inflation to remain at lower levels than this, without trying to pump it up?

For more than 20 years I taught students how to play the inflation game. It meant, particularly in the NZ environment of untaxed capital gain, investing in land-based assets using leverage and then letting inflation ‘do its thing’ for equity.

My role was to help students find a way to succeed in the prevailing economic environment. But I never made the mistake of thinking that this was a sound overarching economic policy. I knew that it led to misallocation of resources, but my students had to play the game of life with the cards they were given and according to the rules of the game set by Government. It was and is up to Government, not the players, to set the rules.

Right now, at a policy level, we need to be thinking about whether the current extent and proposals for quantitative easing are simply holding up asset prices to unsustainable levels and reinforcing economic distortions. It may well be directing behaviours in quite the wrong direction.

Perhaps we need to focus more on other policies that can reset the economy for the world ahead.

There might also be merit in asking some big questions as to whether, within the global economy, New Zealand has become a plaything of international finance. Perhaps that has been the case for a long time. What happens next in New Zealand is highly dependent on how overseas investors might respond within a risk-on environment.  Short-term money flows can themselves be highly distortionary.

It would seem hard to refute that the global macroeconomic system is a complex but ‘jerry-built’ system. There was never an overarching and planned design. Rather it was built piece by piece over the last 100 years, and with many patches. It is a bit of a mess.

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. He can be contacted at

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"quantitative easing is an obvious way to increase inflation to meet inflation targets"
Someone had better explain that to the Japanese, who've been at it for several decades, only to see continued deflation take hold. At least there's a glimmer of hope for us in the comment:
"consideration needs to be given as to whether the Reserve Bank.... has got the wrong end of the stick."
"For more than 20 years I taught students how to play the inflation game...... I knew that it led to misallocation of resources."
Sure you did! Pretty much NO ONE did! It was of no consequence to anyone whilst the game was in full flight. It's apparent now, of course, but 20 years ago? No. As is implied, it was an obvious way to get 'rich' - and the tragic thing about New Zealand today? Many, if not most, people think it still is.

"quantitative easing is an obvious way to increase inflation to meet inflation targets"
Someone had better explain that to the Japanese, who've been at it for several decades, only to see continued deflation take hold.

Exactly. Which in turn goes a long way to understand why large US banks take refuge from disinflation in excessive purchases of US government guaranteed assets way above the regulatory demands of holding HQLA - liquidity preferences. Logical and perfectly rational responses to what QE and bank reserves actually are. Not money.

QE is nothing more than an asset swap from a fixed rate interest bearing government asset to a floating rate government asset. No money or credit can or will enter the private sector banking system from this action - explanatory link

The Fed's Not Pegging Bond Yields, the Yields Have the Fed Pegged

“As an empirical matter, low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.”

Thanks for explanatory link Audaxes.

All you need to know about monetary policy in 3 minutes, set volume to max

Thanks CO

You seem to be implying that QE cannot lead to money creation. Have I misread you?
If we look at the totality of the Treasury bond issuing and RB QE process then:
1) The Govt (via the Treasury bonds) has funded its expenditure. Money has transferred from the banking system to the Govt whic spends this money back in the economy with no net change to the money supply.
2) The banks have bought and sold bonds. Once again no net change to the money supply.
3) The Reserve Bank has bought bonds financed by money creation (QE). Initially the purchase money from the RB to the banks sits in the accounts which the banks hold at the RB.
As long as the money sits in these accounts unused then the additional money has been created but it is not circulating.
To a considerable extent the RB is happy with this because it has created liquidity in the banking system, which would have been lost, or at least risked, if it were not for RB intervention in the secondary bond markets.
RB data is only available to the end of April and as at that time the banks have considerably increased their holdings at the RB.
If the banks can find lending opportunities which they regard as low risk then they will use these funds as collateral for credit creation.
At that point the money creation multiplier comes into effect.
But if firms in the 'real economy' choose not to invest then all we will have done is further decrease interest rates (supply and demand).
So QE has not necessarily stimulated inflation at least at that point.
At some stage there may still be a stimulatory effect but only if citizen borrowers (e.g. people with housing loans) increase their expenditure by more than the decrease in spending by citizen deposit holders.
In an environment of consumers unwilling to spend then Government infrastructure projects would seem to be the only way to stimulate investment in the real economy. But that then raises its own set of questions about worthwhile infrastructure projects.
Can you find a flaw in that argument?

My take is you have overlooked the most powerful stimulus available to government, being tax refunds. Target the job creators.

Infrastructure spending is needed to catch up with the shortfall created by excessive immigration over the last few decades (and to catch up with the NZ First inducement payment of $3 billion to the Shane Jones Fund, taken from the roading fund, presumably). So, it merely serves to correct government bungling. It will take years before it has much effect, due to the Anti-Change Mechanisms accumulated over the past few decades. Apart from those caveats, more government spending when jobs are short will put money in the pockets of ordinary people and be most helpful.

Tax refunds take immediate effect. They deliver money where it is needed, when it is needed, ie now. Target them as you see fit, the objective is to get the money back into people's pockets, now. For instance, refund last years GST, to firms below a certain size, paid out monthly for as long as makes sense. This targets the most productive firms as they will have paid more GST (it is called Value Added Tax, elsewhere). Consider refunding income tax paid last year by the same SME firms, this will return the seed capital confiscated by the state in its capacity as Chief Productivity Suppressor. Income tax refunds to individuals should also be considered. The aim is to reward the most productive and job creating.

If taxes are refunded then the Government deficit will increase. How you propose to fund this? Even more Treasury bonds? And should these be left in the market or should the RB purchase them? Either way, lots of consequentials.

Tax refunds are temporary, when things improve the taxes will flow back into the Treasury. Fiscal drag takes care of it in the long term. My concern is getting things working, rather than buggering them up any further. Governments are expert at buggering things up, usually for every useful thing they do, they do two things to offset it and then some.

1) The Govt (via the Treasury bonds) has funded its expenditure. Money has transferred from the banking system to the Govt whic spends this money back in the economy with no net change to the money supply.

While I have participated in government bond tenders in the past and gave up my savings (deposits), which in reality were created by previous bank lending, to settle the purchase of said bonds, I also believe major bank participants in this funding process write up both sides of their balance sheets to finance government deficit spending. Hence a net increase in money supply caused by net new increases in government bond issuance.

2 and 3) The banks have bought and sold bonds. Once again no net change to the money supply.

Banks exchanged their created savings for government bonds and then exchanged them for freshly created RBNZ OCR bearing bank reserves (an asset to the banks), which must remain on the RBNZ balance sheet until the bonds are sold or redeemed. No further change in the publicly accessible bank money supply - reserves as I have already mentioned elsewhere are not fungible with bank credit in everyday money transactions.

Cash in the system can be viewed here and RBNZ LSAP actions here.

This comment is a big problem. If the banks can find lending opportunities which they regard as low risk then they will use these funds as collateral for credit creation. At that point the money creation multiplier comes into effect.

Banks do not need collateral to create credit. They need independent regulatory risk weighted asset based liquid capital and a lien on the asset a bank debtor bought with a bank IOU (borrower's deposit, bank liability) created when it purchased the borrower's IOU contract to pay (bank asset). No money, no RBNZ collateral, just promises to pay - a good resource underpinning my assertion.

With due respect. I find your posting in-decipherable. I am not sure you responded to Keith’s question put to you.

Let's start with which part do you not comprehend? Personal smears are not constructive.


I can agree with your last sentence.
But at least some of us working close to the land-based sectors (and others taking a helicopter perspective) have known for a very long time that the combination of inflation, leverage and tax free capital gains was a driver of both resource misallocation and increasing inequality between the haves and have nots.

The question from my perspective is now what? The Fed doesn't look like its going to go into negative interest rates - are we? If the Fed can't justify it, then how do we?

And if rates can't go much lower, where then do we 'stimulate from'?

My take is that we've pushed ourselves into a liquidity trap and no further monetary policy is going to be beneficial. We're drowning in debt, asset prices are sky high by all historical measures....drop rates and we create more debt. But do/can we create sufficient goods and services to pay back the interest of the additional debt? I don't think we do/can. Its a road to hell in my view and if not careful (but it might just be animal spirits so care won't count), widespread debt defaults/deleveraging.

Some think the Fed is considering yield caps rather than negative interest rates.- similar to the RBA buying three year government notes to cap the yield at 25 bps.

In terms of managing CPI - if deflation/inflation shows up - how would this work in your view? (your knowledge in this area appears to be much higher than honest question)

If we only had CPI inflation to control!!! Asset inflation is a symptom of rising discounted present values of asset cash flows capitalised by easy leveraged bank credit after the OCR was cut in half five times from 8.0% around July 2008. Removal of central bank inteference in the process of pricing interest rate risk parameters would be helpful if persistent rising CPI inflation became a factor - but I believe the bond markets make the necessary adjustments on their own regardless of central bank posturing either way.

Changes the model we all know very well. Experimental proposals. The innovations are necessary as the result of no where else to go

The Japanese experience is very interesting. To understand it, we have to recognise Japanese citizen behaviours. And yes, if QE and low interest rates fail to stimulate either consumer spending or real investment, and the QE-created money lies idle, then there may well be no inflation. So it comes down to understanding citizen behaviours in the 'new world' and recognising that you can't model to see using econometric data from the 'prior world'. The Japanese experience of the last 30 years has also been predicated on a situation where most of the rest of the world had economies that were growing fast, which is very different to what is currently occurring.

What is unsustainable Keith is land prices rising faster than CPI and wage inflation. At some point income must be able to service debt and lowering interest rates has allowed the illusion of high land price rises to be sustainable to an infinite time in the future. This just isn't so. Prices will either need to slow and rise at a pace slower than wage inflation (because 2% increase on the average wage @$75,000 isn't enough long term to service growth of debt at a median multiple of that - say $500,000 for the average home), or fall back to a sustainable multiple of median income. The lines between wage growth and debt growth have been getting further and further apart - until a point where they can no longer - and that is very soon, if not now.

Also the Japanese are savers who until very recently were able to self fund their own deficits. We are not savers and require the faith of offshore markets to fund our deficit for without it we'd be seeing a considerably lower NZ Dollar and much higher inflation. The faith of overseas investors relies heavily upon our perceived debt levels which have been excellent to date but that's now changing - we are not Japan and risk finding that out badly over the next few years - where was NZ dent levels when Muldoon had the IMF about to walk in on us, about 50% debt to GDP, where is it forecast to be based upon treasury's new forecasts ? pretrty much there !

Japan's private domestic sector is able to save partly because of 1. current account surpluses but mainly because of 2. gigantic fiscal deficits. The government consistently spends more than it taxes which accommodates the private domestic sector's desire to save whilst keeping GDP expenditures at the levels that keeps employment high and creates some pretty amazing infrastructure to boot. Think about it. When the private sector saves (spends less than its income) where does it get the money from? The government.

"Someone had better explain that to the Japanese, who've been at it for several decades, only to see continued deflation take hold."
They still might be better off having done what they have. You either fight deflation or you let it take hold and suffer the spiral down. I have been to Japan many times and absolutely love it. Great country!


"my students had to play the game of life with the cards they were given and according to the rules of the game set by Government. It was and is up to Government, not the players, to set the rules."

Do we as a society not adhere to any moral or ethical laws? Sure, it may have been the 'get rich quick' scheme but look at the destruction it caused.

Game theory. If only the ruthless and uncharitable play the cards as they lie, then you'll only have uncharitable and ruthless with money, power and influence... Writing the rules.

It's up to the government to install fair and equitable rules of the game. There's all sorts of issues in a democracy with getting fair and equitable rules though. That needs a thesis. Starting with Noam Chomsky's "Manufacturing Consent" is a good place.

'There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice; the love of power and the love of money. Separately, each of these has great force in prompting men to action; but, when united in view of the same object, they have in many minds the most violent effects...And of what kind are the men that will strive for this profitable preeminence, through all the bustle of the cabal, the heat of contention, the infinite mutual abuse of parties, tearing to pieces the best of characters? It will not be the wise and moderate, the lovers of peace and good order, the men fittest for the trust. It will be the bold and the violent, the men of strong passions and indefatigable activity in their selfish pursuits'.

Benjamin Franklin

Visionary and correct.

I worked for a high profile individual, who became very wealthy. He had a slick marketing campaign which meant that in public people thought him kind and generous and wonderful. Not a negative word about him would be believed.

In actual fact he was utterly merciless, driven by insane greed and jealousy and would step on anyone and do anything, trash anything in his way on his insane quest to the top. Definitely had sociopathic qualities, an inability to feel emotion or empathy including towards his own children family. More money was his only goal.

Yes, but it is society that sets those rules. And people who don't play by the rules become losers. And it is Government that sets the rules on behalf of society.


Reserve banks can crank up the money supply all they want but if the velocity of money is in the doldrums (I.e the public are weary of spending said money) then they aren’t going to get the outcome they desire.

I agree. And that is why economic theories are only as good as their understanding of underlying human behaviours on which they rest. And sometimes those behaviours change.

And that is why economic theories are only as good as their understanding of underlying human behaviours on which they rest. And sometimes those behaviours change.

Yes Keith. But important to remember that behaviorial economic theories seem to be largely ignored, even though they're being practically employed in the business world through things like trade-off modelling (conjoint analysis) to understand pricing and product / service formulations. When I worked as a supplier to P&G in Japan, my theory was that cheaper store brands would increase market share as people traded off the elements of brand architecture for price. The whole idea that people's behavior doesn't change because of some universal truth that doesn't effectively account for the environment (and the wallet) seems to be misunderstood by many.


Can you point to any established economic principle that proves that a reduction in interest rates will drive investment in worthwhile business activities. My field is behavioral economics. IMO a decrease in interest rates makes an investment in capital gains more attractive than a risk investment. The investment is in the business of capital gain. A capital gain of $1 has an ROI of 33% whereas an investment with a yield of $1 has an ROI of 1% with added risk of a capital loss while the potential for a capital gain is currently zero

Thoughts on the wealth effect? People think they are getting richer and are therefore more optimistic about the future and are therefore more likely to lend/borrow to fund projects?


And the velocity of money has indeed decreased and not just recently. I understand that for example, the second quarter of 2017 saw the lowest reading of M2 money velocity in history. It appears that much of the QE undertaken by different governments has been aimed not directly at getting the banks to lend more for productive investment,but to boost asset values. Here is one quote from the Reason Foundation; "QE is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own property, but passing little along to the rest of the economy". I also figures from the UK which support that view.


The only economy is QE without it economy will collapse and is needed to suuport and promote to inflate stock and house price.

Continuation of Ponzi be it housing or stock one of the parametets to win election and retain Power.


Coronavirus has given opportunity to government of an excuse to print as much and distribute. Sure shot formula to win election.

In NZ house prices is linked to prosperity (As has no other economy which gives an affect of Rock Star to many ) so any money thrown in economy in NZ will inevitably land up in housing market only - therby creating a bigger bubble and now even stock market where many new entrants have entered for fast money. From this peak and with real economy down and out, it is a perfect receipe for disaster.

This could be the boom of all booms talked about decade ago?

So, just wealth transfer from the working classes to the asset owners. Feudalism through central banking and government populated with aspiring aristocrats. Some of whom will pretentiously and without any self awareness rant against redistribution.

Thanks again, Keith.
Uncharted territory, what could go wrong?

Anything gone wrong- Blame Virus but if printing and distributing money the way labour is doing nothing can go wrong atlease in terms of vote.

Unmanagable money flowing in NZ market anx many have made a tiny fortune from government generousity - Though 10% who may have lost jobs have been badly affected but that has been offsetted by 90% who exploited governments freebies and ejoying Like never before - No domino affect of job loss visible as have heaps of easy and free money floating in the market.


(Comment from a US article today)
"We've got hundreds of PhD economists working on some arcane mathematical models to help us understand the mystery of why giving trillions of dollars to the already super-wealthy somehow made them even richer. It's a real puzzle, but we have our best people working on it, our best people."


Correct me if I'm wrong here Keith but these articles seem to come out when there is a (supposedly) 'non farmer friendly' party in power.

Yet when mass immigration and foreign buyers having free reign to buy nigh on whatever they wanted was in full bloom while the, 'very farmer friendly' party (ie - John Key and his 4 way coalition) was in power I don't remember you complaining about that pumping up prices to artificial levels. (but I am going off the top of my head here so again, I'm happy to be corrected).

Correct me if I’m wrong but these comments about comments come out just prior to elections, even from some who joined the site just before the last election. I wonder why that is?

I joined the site jut prior to the last election expat?


You are correct in stating that several years ago I was not writing publicly about macroeconomics. Rather, my focus was on the agri-food sector. And if you go back and look at those articles you will find that I always try and go where the evidence seems to lead, which means that I do make my share of enemies.
It was with some hesitation that in this article I branched out into macroeconomics. I had hoped that some of my macroeconomist friends would take up some of these macroeconomic issues and write for 'citizen audiences', but they are uncomfortable about exposing themselves to the vitriol of that general public, and with good reason.
In relation to the economic policies of the major political parties it seems to me that it has not made a great deal of difference as to which party was in power. Of course there have been some differences in specific policies, particularly in the social sphere, but the major parties have chosen to sing from the same song sheet in relation to overarching macroeconomic and financial system policies. So, I don't see the issues that I have chosen to discuss here as belonging specifically to any one political party.

The issues that are coming at us now Keith would appear to be decades in the making - and politicians think in terms of the self/party and in periods of 3 years - so from a macro view, they are useful as being half pregnant.

If politicians could solve these types of issues - why didn't they in places like Japan? Or in terms of property bubbles, why didn't people take the steps to prevent them or limit the damage in places like Japan, USA, Spain, Ireland etc. Its animal spirits and people behaving in a herd mentality without looking at the bigger picture. It could be that in 5 years time, we have 20% unemployment, our debt bubble has exploded, wages are stagnant, inflation has arrived in the items measured in the CPI and we have interest rates at 10%. And people will be saying 'how the hell did that happen?' But I say, how the hell did we end up with interest rates at 0%, housing at a million dollars pop in Auckland, and central banks playing god with land prices? Its bloody nuts.

The main reason why? Because we've been living for today at the expense of tomorrow. And tomorrow will come and we will be carrying the debt of today and tomorrow, tomorrow.

Good article and true, As people are loosing their jobs/incomes, default on loans; banks won't risk lending to those who can't service debt, for minuscule margin returns, the economy will inevitably faulter and contract.
This will serve little to increase already unaffordable house prices relative to incomes, interest rates have very little room to drop after years of debasing/undermining the dollar value post 2008 GFC, the correction / reset is inevitable, possibly starting not long after the election :>


Isn’t this about debt, really? A decade of lowering interest rates encourages people to take on debt, so consumption ticks up, until everyone is either too indebted to take on more or unable to afford the inflated asset price. At that stage, lowering interest rates doesn’t help - but you’ve also made it impossible to raise them. It’s just staggering how the Anglo nations had the example of Japan, then the Eurozone, and then went ahead and repeated exactly the same mistakes. Anglo exceptionalism. Very smart people being very stupid.

Yes and people using leverage in existing properties to buy more properties. Using debt to gamble on asset price appreciation. Its great until its not.

Great article, thanks for explaining just how this QE works between the Reserve Bank, Treasury and the bank intermediaries. It’s really interesting how the Social Credit theory of credit creation by government instead of private banks has become mainstream without this really being widely acknowledged. Of course the first Labour Government did this to a modest extent in the late ‘30’s to ramp up State Housing.

I did notice that your reference to mortgagee should surely be mortgagor, ie the borrower.

You are correct re mortgagee and mortgagor. My bad.
KeithW creation by government instead of private banks has become mainstream without this really being widely acknowledged

Public and private credit creation are symbiotic. However, it is the commercial banks who've been largely responsible for the credit-driven property bubble through 'lending into existence.' Most people still don't really understand it but at least more people have 'heard about it.'

Whoever it is that creates the credit, it occurs according to the rules of the game, and those rules are determined by and hence controlled by the Government, with the RB an arm of that Government.

Any generosity by government should not be universal (which has allowed many to make small fortune - Yes fortune) but should be targeted to those business that have been affected by border closure and travel restrictions and unable to operate for no fault of theirs (As wil need more support till we see some relaxation of border/Travel restriction) and not businesses which have started operation.

But for how long? How do you know this isn't just the beginning? It could take years to resolve this pandemic? What happens if those business models aren't right for the 'new world' we're heading into? Isn't it better for them to fail, to redesign based on a new environment, then look to thrive in that - instead of stagnating and expecting to be carried by the public?

I would certainly prefer that we allowed society as a whole to reset, with an appropriate safety net. I don’t think the health crisis is over. It’s like a roulette wheel that keeps spinning and we’re running out of luck.

I'm conflicted. I'm a recentish (1 year ago) FHB so vulnerable to a correction through no fault of my own. But the current system is unsustainable. It's not in my long-term interest to have to have an escalating market where people work themselves to the grave for lower living standards than previous generations (for all our technological advances, no less).

We have a government-owned bank. Speaking purely out of self interest, we could set up a mortgage product that let FHBs still living in their first homes the chance to insure their equity at current levels. Then we could wind-back state support for the rental market (accommodation supplements), implement aggressive capital gains taxes and let prices fall to a more natural level. Millennials wouldn't be left carrying the can, new FHBers would be buying in a more affordable market, and we wouldn't be expecting the cohort bearing the brunt of the lockdown that saved their elders be exposed to negative equity they may not ever recover from.

This is not a purely logical outcome, of course, but it is a just one. And that seems more logical than just blowing the bubble ever higher, and then everyone having a hard landing.

So I sell my house to my children and lease it back with my equity protected?

So...make a rule saying people can't do that? We do it for FHB grants, it's not rocket science.

Why not give them a meritocracy to compete in?

Understand even that should not be forever but those business should be given a chance if any businesses need support for now are those business.

Come on Keith
Every action by the RBNZ involves winners and losers. Never see that aspect discussed. Or quantified. Current moves in interest rates are transfers of income from savers to borrowers. The winners are existing borrowers. The losers are savers. The indebted borrowers have had their net incomes increased. Or their losses reduced. What will the borrowers do with the government decreed windfall. Will they invest? Unlikely. What will the savers who have had their incomes reduced do? Spend? Unlikely. Will they go seeking higher investment yields? Possibly but unlikely. The name of the game right now is capital preservation. Chasing yield by savers didn't go well with the implosion of the 63 Finance Industry Failures not so long ago. So where do they go now? The elderly are no longer in the speculative cohort. They will not invest.

NZ was once an egalitarian society where the gap between the rich and the poor was narrow
That gap has increased markedly.
What is it now?
The last diclosure by StatsNZ was 3 years ago, but they only publish nonsense data
They don't tell you what the comparatives were in 1950, or 1980, or 2000, or 2010
Ask what the change was between 2010 and 2020
That will reveal what has been achieved recently
Then articulate the probability of what is happening now
How does QE help that - explain

I agree that every action of the RB creates winners and losers.
I also agree that for those who have capital an increasing concern is preservation of that capital in a very uncertain world.
I also both agree and regret that NZ is very much less egalitarian than it was 50 years ago.
The challenge then becomes to find the policies and rules of the game that can address that situation in these uncertain times.

Keith what rarely gets acknowledged is that NZ is a small, open trading economy. If our trading partners are implementing ZIRP, NIRP and QE we really do get swept along. Not to follow would see a rise in the Kiwi and an export led recession. The other factor is the loss of pricing power by most manufacturers, which has created long-term structural deflation in a swathe of goods from cars through to TV's etc etc. In order to get close to inflation mandates central banks have enabled asset price inflation.

So this does create winners and losers, however the game is the game and you can swim upstream or downstream, it's an individuals choice.

Te Kooti,
I agree that NZ can and does 'get swept along'. And I agree that exchange rates come into play. That was why I made passing reference to our exchanges rates becoming a play thing of international finance. I may have more to say about that at a later time, including how the associated risks might be managed by controlling where and where not those overseas funds can find a home in NZ.

Jamie Dimon said of the GFC " when the band is playing, you gotta dance"

Have a look at these charts on enequality in the US - I can only imagine that we're in a similar position, following similar trends as we mirror Fed policies:

It looks like central banks are doubling down on their experiment of lowering rates and QE - which to me is just backing them even further into a corner which they probably now can't escape from. Even the body language of J Powell and A. Orr is a give away. They look like they're shitting themselves as they know they can't keep doing what they're doing without it eventually backfiring on them (it would look to me that we're either going to follow Japan and head into long term deflation, or inflation is going to show up in the form of stagflation and we're going to struggle with high unemployment, high price levels but no wage growth = misery index extreme level).

Thanks Keith. You have managed to address the issues without slipping into the current social disease of assigning Good or Bad to specific policies, actions and personalities. Well done.

There is so much misinformation in this article that it should not be taken seriously. MMT is an accurate description of how our currency issuing governments finances operate and it is nothing like what is being said above. All government spending is made by creating new currency, every single dollar of it, taxation later returns money back to the government at which point it is cancelled again. At no time is money borrowed to finance the government and it does not do so, borrowing serves other purposes. QE has very little effect on the economy as it only increases commercial bank reserves and bank never lend out their reserves, banks create new money when they lend, they are capital constrained and not reserve constrained in their lending.
A link here to the Bank of England describing how banks create money.
Links here to Prof of economics Bill Mitchell explaining why governments borrow.
Part one.
Part two.

I am well familiar with that 2014 working paper by staff at the Bank of England.
MMT is indeed a useful way of looking at money creation and how money circulates. But perhaps best not to be too doctrinaire in regard to that particular model.

Some further explanation here from economist Dr Steven Hail of Adelaide University on how he understands our monetary system to operate.
A lecture here from economist Stephanie Kelton of Stony Brook University as to how she understands the monetary system to work.

On the topic of land prices.

Land is super expensive in NZ by all measures. And how many people in government own land - many. And how many people that vote own land - was most (but the rate appears to be dropping significantly). So why would anyone have a motivation to make it more efficient when incompetence is making one wealthier? i.e. the worse we are at our jobs of efficiently making land available for development, and the more we vote for parties that are incompetent at enforcing efficient regulation, the more scare land becomes and as a result is more valuable!

Its great! Be as useless as possible, for as long as possible, and watch your land price go through the roof! As a country we can get rich by being useless is the motto.

This philosophy will work incredible well for a period, like a car without a service, then it won't.

Incisive break down IO. The solution to the issue you raise is simple but often counterintuitive. "Georgism", high land taxes and lower taxes on productivity.

lol that is hilarious! "incompetence is making one wealthier" yup that is where we are. I've done really well but it is so weird to see people who are really bad at what they do have better outcomes. My personal yardstick is a house I like in the Hollywood Hills that I passed on. I would have made $12 million if I bought the place but instead I was dumb enough to invest the money into real businesses which means I have done worse. It's ridiculous. The idiots keep winning.

Even lottery winners start to credit themselves as deserving their windfall because of their nous.

What are the optimal economic policy settings. Then we can all vote for that new political party willing to implement all policies. Will be radical change for a time. Will be to the benefit of all interests/stakeholders... Yeah right.

These issues will not be solved by one political party or the other. Political parties look after themselves & their sponsors. The rest of us can sing for it - to no avail. These issues are in many ways beyond politics as we know it, but sadly we need political leadership to enact any changes needed. There is no one way, as Keith points out. The situation is fluid & needs constant tweaks or changes, it is man-made & therefore fallible, after all. My theory refers to the fact that we are probably at peak people, especially in the civilised half. We can grow by the migration of those from the other half, but as we've witnessed, this is both good & bad. We also know that we cannot continue to create stuff for people at the rate of the last 30 years (hyperglobalism). Even more so when most of it is crap. We need to build for longevity not obsolesence. We need quality, not quantity. We need personal responsibility not welfare. Government is not the answer. Government is the problem.

Government is the problem - Ronald Reagan 1981.

Swap general inflation with property price inflation/debt and his speech could be perfect for 2020.

If the government is a problem in a democracy. Then the people are the problem.

"Every nation gets the leadership it deserves" - Joseph de Maistre

I don't disagree - US is a great example at present.

I don't understand why people think QE causes inflation. It almost certainly causes deflation. All it does is inflate assets like it did post 2008.

Agree - and you conveniently don't include the prices of any assets in the device used to measure inflation (e.g. land in the CPI) so you can continue to push the official cash rate lower and low and say 'were just keeping inflation within our mandated band approx 2%.... Inflation targeting coupled with QE creates debt and capital asset price bubbles. But we're going to pretend we don't know that because central banks are about 'stability'...(yet will be the greatest cause of instability in the long run).

Yes, plenty of capital about, but will it help keep jobs at the SME level in NZ by encouraging capital investment in the firm? In an economy already notorious for not investing in productivity raising technology and other methodologies I don't see MMT changing that behaviour of SME'S anytime soon....

Keith chew this one over: Instead of M.V=P.Q try (M.P)+i=P.Q
That is my rework of the quantity theory of money to account of interest. I conceived it and published it on this forum in 2013. I also made predictions, firstly that interest rates would drop over time and that the Reserve Banks are not in control of this trend. They can only control the peaks and troughs.

Also predicted was that the velocity of money would drop(it isn't fixed). Audaxes posted a link a few weeks back that was an empirical study from Japan on how velocity drops as money gets tied up in asset inflation, my intuition was correct on this.

I also predicted the money supply had to keep growing each year to print the interest required into circulation. My prediction was eventually for a hyperinflationary environment or that default on existing debts would occur. Dalio is predicting the first scenario, that debts will be inflated away by governments. The exact mechanism isn't so certain just yet, but it is likely that governments will keep selling bonds and may even start money creation directly. This money does need to find it's way into circulation though, unlike QE is its present form.

My thought is that all assets demanding a yield will behave like money. Also over the longer term of a money cycle that interest rates peak at a maximum extractive value and then decline from there on. That was the mid 80's. Ultimately production is required to keep up the interest payments, when it can't the system prints money until failure. We are probably just in the early stages of the real money printing. This is also ultimately a resource event, production needs bits of planet to support it.

Good over-view of the historic scenario to be played out.
Profit and production are also a problem due to ageing populations
Debts will not be repaid but continue to revolve as usual.
Erosion via inflation or outright default likely and stagflation most likely of all..
I note that NZ productivity per head and GDP per head been declining since 2014.

mikekirk I think we will have some form of involuntary debt jubilee. I'm not thrilled about this as I own a lot of debt but it seems likely.

Yes, I will chew this over.
Until I have chewed sufficiently, I will not comment on it further

My current thinking is that interest simply represents a transfer of money from one party to another. It does not have to imply an increase in the supply of money.
The long term global decline in interest rates may simply relate to a lack of global investment opportunities (as opposed to money shuffling exercises). Citizens are wishing to save more than what investors wish to invest and interest therefore declines in the search for a new balance. This was occurring independently of and prior to the COVID curved ball.

Keith, I'm glad you are giving this though. I'd amend what you say to interest simply represents a transfer of wealth from one party to another. It is unearned income and is why Aristotle described it as immoral.

To really get a handle on money forget it is money and remember it is a proxy. Always boil it down to basics.

I had this argument with Don Brash on facebook. He lost. He tried to demonstrate to me that I was wrong and used bushells of grain. I showed him using his own example where the transfer of wealth is and he didn't have an answer to that.

I've PM'd to your Lincoln email :-)

"It does not have to imply an increase in the supply of money." Keith it does because money is created by debt creation. Money doesn't just exist it gets loaned into existence.

V good explanation of the prevailing 3 card trick by gov, Treasury and capital markets to depress interest rates.
Crux for me is how long it takes for the countervailing winds of consumer caution (v prev confidence) to turn around. My best estimate would be 2 years to get back t level of spending by consumer of early2019. However, if unemployment remains 8-10% after "recovery" then this rebound in confidence will not happen. Given the risks with finance being taken by the fed and China, people have limited safety options for investment. Unfortunately the primary gainers from QE in immediate and medium term are government borrowing and asset inflation (read, stocks and land and housing). So, those that hath will gain most. For a change.World power system is moving towards China all the time with USA essentially bankrupt and relying on dollar privilege . This is likely to implode b4 2025 and NZ has to decide where to cultivate its partners. Hard choices ahead


At the bottom of all this financial wizardry is what sort of society do we aspire to be:
You just have to look at this week's news, policeman killed, numerous women beaten up in domestic violence,etc. We all know who's involved; young Maori not able make it in the 'real' world, so turning to drugs and drug-dealing to enjoy the consumption-based lifestyle (Harley Davidsons, guns, expensive cars, etc ) that those more conventionally successful 'enjoy', and taking their life-style culture straight from American trash films and TV.

Back in the mid- 1960s I worked two successive seasons at Hellaby's meatworks fell-mongery at Westfield, South Auckland. I worked on the floor in front of the 'pullers' who removed the wool from the chemically treated pelts (skins).
The caller would call out the type of wool that I would be scooping up from the floor after removal by the 'pullers,' and then placing it on the conveyor belt to be taken for washing and finally drying.
The 'wool pullers' were all Maori, at least two dozen of then in a line across the building with automated lines of treated pelts slowly being feed to them from behind. I have never worked with such a bunch of happy work-mates working hard but all the while laughing and joking with each sarcasm or cynicism which I had met, and was to meet with, from fellow Pakeha in other work environments. These guys all had their stable families to look after and I looked foward to join them in the pub in Otahuhu (from memory the 'Criterion' on the Great South Rd) after the Saturday half-day's work. There I would join a wooden 'stand' surrounded by a half-dozen of these workmates and partake of a few beers which were served from big glass jugs. The talk was innocuous and usually about rugby, league or fishing or their kids. ( I was only 16 and 17 years old and the age limit for going to a pub was 21 years, but a blind eye was turned ). There was no aggro, just the satisfaction that they had completed a week's hard work and could finally relax over a few beers. They were certainly paid well on a piece-work basis which is why they worked hard.
This was in the mid-1960s, and in the 1970's the UK joined the ECC and the period of exporting all the agricultural commodities we could produce to England finally came to an abrupt end. Eventually Hellabys closed.
There was certainly no Maori gang problems those days. There was no trash films or tv, just innocuous cowboys and indians.
I mention all this because, it seems that if the world is going to become self-sustainable financially by printing money, then perhaps we should bring back some of the old work practices to at least address our social problems. Firms like Hellaby's wouldn't have to be profitable with the government supplying the finance, and if the post-brexit trade agreement with the UK comes into effect then maybe a profitable Hellaby's or similar could reappear. I hope so.

Streetwise. Great snapshot of a bygone era. Thanks.

Yes you take away people's jobs and the alternative for them is a life on drugs and alcohol. Then beating up the wife and kids, getting into trouble with the police and so on.

Our neoliberal experiment has failed. Yes, we subsidised those jobs you are talking about. Which was always seen as a bad thing. But we're now doing that for practically everyone.

And the people out of work? We're paying for a bunch of them to stay in jail... It would actually be cheaper to just employ them.

In those days Full-time-Maori used the extended-family to shunt chldren around within their immediate-extended-family. Do they do that anymore? Or is it simply Part-time-Maori males fertilising their current concubine then moving on a year later to the next one, and then the next-one, leaving the taxpayer and taxpayer funded whanau's to pick up the tab

Once those bonds, that where purchased under LSAP, are repaid the inflation rate will be dragged downwards again. QE just moves inflation for the most part.

In my view our fundemental error was to believe that monetary policy can be seen as distinct from the fundemental economics. The force driving deflation is technology (IT, industrial production etc.) The idea of a reserve bank as separate and independent entity from government is clearly flawed and increasingly they cannot act independently of one another anyway.

Yes, the Treasury bonds could be repaid, by the Treasury buying them back from the Reserve bank, or the RB could put them up for sale to anyone else who wants to buy them, but there is no need for either of these things to happen. And that lies at the core of MMT. Alternatively they can just sit there on the books for ever.
If the RB sells them to the banks, this this would be an exercise in Quantitative Tightening. The Fed took some tentative steps in this direction in 2018 but quickly got cold feet.

The core of MMT is the Marxist fantasy that no level of government spending ever matters. The way we are running capitalism currently sucks but there is no need to fall for utopian nonsense either. The winners currently are not being decided on talent which needs to change but moving that to winners being decided on who is closest to the government (MMT) is a horrible response.

No it is not. Marxists typically bemoan the lack of MMT gusto for a workers' revolution and say it isn't lefty enough cause it doesn't talk about the ownership of the means of production! That's cause MMT is not a political programme. It is a description of macroeconomics under fiat regime capitalism. The level of government spending absolutely matters. Deficits matter. Spending needs to be "just right" - not too much, not too little. Idle labour and productive capacity? Spend more. Fully employed economy with all resources employed - run a surplus. Deficits matter for their real effects on employment and inflation though - not because of their level, or the debt to gdp stock on a spreadsheet or for financial crowding out or government default. "Deficits do matter - just not in the way you think they do" - or have been taught in econ 101 they do.

The core of MMT is that fiat regimes in sovereign currency issuing nations can use money functionally to promote public purpose because there is no scarcity of money. There is no gold standard or foreign exchange rate peg to defend so the amount of money spent can be decided based on what the macroeconomy requires to reach full employment without reguard to prior debt to gdp levels. If spending is the lifeblood of the economy, MMT says blood is in plentiful supply and if a transfusion is needed then do it. It does not say keep spending when the limits of the economy's capacity to absorb the spending is reached.

I get that MMT enthusiasts literally have no idea where money is created. The sovereign is not making it in the shed like MMT theory believes.

"It does not say keep spending when the limits of the economy's capacity to absorb the spending is reached." Like I said, Utopian nonsense. What government entity anywhere in the world would voluntarily stop spending when they have an open checkbook. The idea goes beyond naivete I doubt anyone actually believes this it is just a useful lie. Unlimited spending with politicians controlling who gets paid is a Marxist dream. Lets not pretend it is something it is not.

A government that wants to be reelected will not want to cause hyperinflation. Polities will (for some crazy reason IMHO) tolerate unemployment and recessions for years but woe betide a government presiding over inflation.
Where exactly do you think the outstanding money stock in the economy comes from? If it comes from your backyard shed the police will be interested. Banks can create deposits offset by loans but they can't settle with each other in anything other than reserves. Nor can taxes be paid in anything other than reserves or cash. The monetary system we use is absolutely based on the NZ dollar issued by the NZ government. MMT is not about unlimited spending. It is about spending enough to reach full employment and stabilising demand so that you don't have scarring recessions. Its about using fiat currency for public purpose.

Once those bonds, that were purchased under LSAP, are repaid

Hahahahahahaha, yer dreamin

How True - Read (Though for subscribers only)

Governments Find It’s Easier to Provide Virus Relief Than End It

It has been an arresting sight to watch the prices of New Zealand's stock market listed companies head ever higher, even as the economy disappears underneath them.

Yeah beyond understanding to anyone be it experts or economist but the level of QE thrown like never seen before is at play with no one knowing the outcome or may be aware but afraid to accept the consequence.

If one person owns all the assets on the planet how rich are they? Extremely poor, it turns out, unless they can lend or give money to any other person to make a bid.
My definition of a good economy is one which has a lot of high quality goods and services that the vast majority can afford to purchase. If enough people have money there will also be opportunities to invest and meet that demand. Super low interest rates meant to encourage investment will have no effect if not enough people have money to spend.
We have been taught that the inflationary years of the 1970s were symptomatic of a bad economy yet the inflation or stagflation implied plentiful demand and opportunity for investment. Imop the definition of a good economy.
Which begs the question of what went wrong? Here we are 40 years later with a much worse economy. One that does not suit savers, potential home owners or retirees. Even those with mature careers and there own homes are looking down the barrel of housing asset price deflation. What has happened really deserves some very carefull scrutiny.

Keith, this is Bret Weinstein on covid, starts at 1:53 in. Clever guy.

You got MMT wrong.
The concept of MMT is that government spending creates reserves while government taxation deletes reserves, and selling government bonds are a monetary policy operation to swap reserves for bonds. QE is an asset swap of bonds back into reserves, and so it doesn't change the amount of net financial assets in the non-government sector.

Lets go back to where we came from .
Dont spend it unless you have got it.
Only borrow if you know you can pay it back.

Right now that would lead to the Govt having no way to fund much of its current expenditure. The consequent tightening would push the economy into a downward spiral. That was what happened in the Great Depression of 90 years ago, at a time when there was even less understanding of deficit spending than now. Almost certainly the financial system would collapse. My concern is not that deficit spending is necessarily bad, but that there are limits.

Economic Collapse, as you say, even in part will have terrifying consequences for many.
How likely is this money printing to keep us buoyant in choppy waters and how long before we reach our safe destination?

"Right now that would lead to the Govt having no way to fund much of its current expenditure. The consequent tightening would push the economy into a downward spiral. That was what happened in the Great Depression of 90 years ago, at a time when there was even less understanding of deficit spending than now. Almost certainly the financial system would collapse. "

Of course you are right Keith. There is no alternative.

Whatever they go with, I and I'm sure a hell of a lot of NZ have little faith that it will run correctly.

OK. I'm not going to be overly critical. Woodford is sort of on the right track with MMT but seems to confuse MMT itself with QE, and then QE itself with deficit spending.

1. MMT is not QE. MMT is a way of analysing and theorising macroeconomics that is based on how the monetary system actually works - not barter, not gold standards, not loanable funds, not money multipliers yadda yadda yadda. It is pretty apolitical as a theory. It is not a set of policy recommendations per se. How you use it is based on your political POV.

2. QE on its own is just an asset swap. Say the government was running a balanced budget and not issuing new debt, the RB could still do QE by buying up pre-existing debt and swapping bonds for reserves and the net financial position of the banks etc would be the same - just now holding slightly more liquid reserves instead of bonds. In fact RBs do that all the time to manage the amount of reserves in the system and interest rates.

3. When the government deficit spends (say via issuing bonds in the traditional manner) the net financial assets of the private sector increases. The government spends in more money in than it taxes out issuing a bond to cover the difference. The new wealth is held in the form of the bond. Crucially the deficit spend represents new SPENDING into the real economy. And that is what provides the stimulus to employment and activity in the real economy. It increases incomes and has a multiplier effect increasing demand in the REAL economy. Stuff gets made. Services get provided. People get jobs.

4. When the government deficit spends AND QE is undertaken at the same time the new wealth for the private sector is held in reserves instead (and the RB holds onto the bond). Tickets get clipped in the process by the primary dealers in bonds - lucky them. Now the RB holds the bonds so one pocket of government owes the other and it never really matters if they are written off or quietly forgotten about. Which is why MMT says - why bother with the bond issuance in the first place?. Just use money creation or overt monetary finance - OMF. But what is more important than the OMF versus bond issuance is that the deficit spending occurs into the real economy when it is needed.

MMT basically says QE on its own is pretty damn useless. Yes it lowers interest rates a bit which might have marginal benefits to investment and some wealth effects but the GFC has shown in one giant empirical experiment over 10 years that it doesn't do much for mainstreet. Why? The demand squeezing fiscal austerity and not enough government spending could not be cured with QE alone. Banks don't lend more cause they hold reserves rather than bonds. The lend more when creditworthy customers come through the door cause they sense demand increasing in the real economy and want to invest or consume safe in the assumption that a recession isn't in progress. Hence more reserves does not mean more credit creation per se. Unemployed workers are not going on a debt fueled spending binge no matter how low the rates are.

MMT says what you need right now is a giant counter-cyclical deficit spend if you want to fill the spending gap left by coronavirus. How you account for it on a ledger is less important than that the spending happens into the real economy.

The advantage of overt monetary finance is that it removes the corporate welfare that government bonds are, stops the ticket clipping in QE and removes the focus on the debt to gdp ratio which is of no consequence to anyone in a fiat regime where governments cannot default (unless they choose to) and as an absolute number has little effect on either inflation or interest rates (see monetarily sovereign nations US, Japan).

well he is on the money about older people who rely on ever declining interest rates changing their spending behaviours,if the bank pays one per cent after tax then that is a pretty low threshold to beat.

I agree with you that MMT "is a way of analysing and theorising macroeconomics".
I also agree with you that QE is initially a swap between asset types.
The key issue is what happens next with the reserves.
Typically these reserves replace other reserves which the banks have used to purchase the Treasury bonds.
It is largely a matter of semantics as to precisely which step in the process has led to the money creation; the key issue is that money has been created in the overall system.
When I refer to Government I am talking about the combination of the two different arms - Treasury and RB.
I also see merit in the RB being active in primary markets for Treasury bonds rather than just secondary markets. This still allows separation between the Treasury and the RB.
I as agree that this is the time for deficit spending into the real economy - as long as that spending draws on resources that would otherwise have lain idle and does not crowd out other forms of productive investment.
I would love to see encouragement given to shifting call centres back to NZ. And I would love to see investment in a much greater expansion of walking trails in 'off-road' NZ. These are examples of activities that would largely draw on resources that have low opportunity cost and hence will not crowd out other productive activity .

Mr Woodford it seems you are nearly an MMTer (end the sham of central bank independence I say)! With deficits and QE together, the money "created" is in the form of reserves or base money. Reserves can go stratospheric but if credit creation contracts (as it does in recessions as households pull back and investment falls) then broader money measures do not explode. The GFC was a case of this. MMT negates the money multiplier view of credit creation cause it is not how it works. Banks are not reserve constrained. Demand for loans is what matters, not base money levels. I would suggest the new money spent into the economy might well not be enough to offset the spending contraction from the loss of tourism and export education and generally households pulling back on spending. The best way to ensure spending does not crowd out the private sector is a Job Guarantee at the minimum living wage. Pay people to do basic socially and environmentally valuable work that the private sector isn't interested in. When demand returns with the marginally higher wages in the private sector most labour will transition back to working the private sector again. It is the auto stabiliser par excellence. And doesn't crowd out by luring away resources. By definition it uses resources for which there is currently zero bid. Then you have a workforce no longer scarred by long term unemployment and some clean rivers, nice art projects and community gardens to boot. Centrally funded, locally run. Combine it with training opportunities. Tailor it to the individual. End the indignity of the dole. Walking trails could be an excellent Job Guarantee job for the young and fit for example. Combined with trades training perhaps.

I would be very cautious about being labelled as an 'MMTer'.But I do accept that MMT provides insightful ways to look at an economy. It is a model with which we try and make sense of an incredibly complex and chaotic world. When Paul Krugman criticises MMT as not making sense he is using his own model as a frame of reference, and that model may no longer be fit for purpose. I follow the thinking of British econometrician George Box who said a long time ago something along the lines of 'all models are wrong but some can be useful'.

Deficit spending is "new wealth"?! You shouldn't have to explain to a child why this is ridiculous. Yes, sure it is to the politically connected people who receive the money first but it is a tax on everyone else.

"governments cannot default (unless they choose to)". The education system really is a failure. You are really arguing that every sovereign in history that defaulted woke up one day and said: "you know what, I'm gonna take the dogs for a walk and also default today. Seems like a nice day for it!".

They can default if they are borrowing in foreign currency. You can't create that with your spreadsheet. Greece can default as it can't create Euros. So can Italy. Argentina can if it borrows in US dollars. NZ can't. Unless it chooses to.

When the government spends into the economy more than it taxes out, by definition the private sector has more net financial assets. It is accounting 101. Whether inflation means the real value of that new wealth is offset depends on what is happening in the real economy.

All QE does is debases your currency .

Instead of doing this , the Government should run a massive deficit and ramp up infrastructure spend , spend money on actual STUFF .

Roads , Hospitals , schools , bridges , airports , just go for it

or maybe ideal time for an old-school census that is accurate.

And ye shall find your saviour in a manger in Eketahuna...

But somehow this deficit has to be financed.
It can borrow from its citizens (through financial institutions) or it can borrow from the RB with the RB creating the necessary money.
There is no other way that I know of that the deficit can be funded.

The true cost is not financial. It is the real resources used in the projects. MMT says worry about the real resources - not the financing.

The government creates new currency when it spends, money is typed into existence from a keyboard at the reserve Bank. Spending creates dollars and taxation deletes dollars. No borrowing is actually necessary for the government to spend. Do you not look at any of the links that are posted in the comments?

Thanks to Keith Woodford for a great article on quantitative easing.
It seems that Central Banks around the world are convinced that an economy can borrow its way to prosperity.
Rather that suffer an occasional recession during which the economy enters a period of adjustment through the action of market forces with some involvement of the central bank, central bankers believe they can run the market better than the market to a degree whereby recessions need not be tolerated. Their success, in a number of countries around the world, is referred to by many writers as having an “unblemished record of failure”.
The reality is that since the abandonment of the gold standard in 1971 we have gradually moved to a system of creditism there being few principles of capitalism remaining. The evolution of central bank policy on interest rates and quantitative easing has led to malinvestment of capital on a grand scale and has all but destroyed the concept of honest price discovery. Asset price bubbles have been blown in shares, bonds and real estate whilst little of this additional liquidity has found its way into the real economy.
It was disappointing to learn that both the Australian and New Zealand Reserve Banks recently announced quantitative easing policies and openly talk about introducing negative interest rates as a policy tool with little if any interest shown by main street media.
Why it is necessary for either economy to go down this path, both having relatively low levels of government debt compared to the rest of the world is surprising.
That said there are serious concerns as to whether the amount of sovereign debt being issued around the world at present could be in fact be financed by the bond markets.

There seems little doubt that New Zealand and Australia are now on the path monetarising government debt. One can’t imagine how attractive this must sound to politicians; the ability to issue endless debt and along the way socialise the economy.

A look at what has taken place in the U.S. and elsewhere around the world may indicate where we are headed.
Against a background of world-wide deflationary forces debt has grown enormously with little economic growth and falling tax revenues.
Pre Covid19 the U.S. economy required at least 2% annual growth in credit to avoid falling into recession, borrowing between 3 and 4 dollars to produce one additional dollar of GDP growth.
Growth in U.S. corporate debt has exploded, upwards of $3 trillion having found its way into share buy-backs, little having been spent on growing companies leading to the creation of jobs.
More recently the U.S. Treasury and the Federal Reserve created a structure negating the need to alter the constitution of the Federal Reserve and so enable the purchase of corporate bonds to take place through a privately owned funds manager. Their first round of purchases evidently included a large serve of Hertz corporate bonds!
It is now well established that the Dow Jones front runs the Federal Reserve’s next interest rate cut or round of quantitative easing and that any meaningful increase in interest rates would cause a wide ranging fall in asset values and substantial, some say crippling, rise in the cost of servicing government debt.
If we look at the Japanese and E.U. central banks they not only buy government debt but also company shares and corporate debt. Japan’s central bank has become a major share-holder in many Japanese companies and owns 40%+ of all government debt.
In the case of the E.U. the purchase of corporate debt even extends to debt issued by corporates to cover outstanding interest on loans i.e. corporates that are basically insolvent but kept alive simply because they employ a lot of people, typically known as “zombie companies”.
Where does all this end? Nobody knows but there is much talk about a debt jubilee (they have occurred throughout history) and what is referred to as “the great reset”. Most agree there will eventually be a crisis in confidence in fiat currencies causing a complete melt down of the financial system followed by the establishment of a world currency of some sort to be used for government to government transactions (no one country will hold world reserve currency status as the U.S. presently does). As for the rest of us, probably crypto currencies of one sort or another.
The big question will be how this is handled and who the big players are. No doubt the World Bank and IMF would be involved. There have been recent moves within these institutions, for example the U.S. no longer has a power of veto within the IMF and China’s Yuan has been added to the IMF basket of currencies. Some observers say gold is in the mix, sighting the huge amount of gold purchased in recent years by China and Russia and the repatriation of gold by a number of European countries from off shore storage facilities.

I remember when everyone was criticising the Greeks.

Now they're all trying to be Greek.

Great summary of where we are at Rudy - thanks.