By Bernard Hickey
I am about to commit economic heresy, but at least I'm in auspicious company and it's something our own Reserve Bank and government has done before.
It's time the Reserve Bank of New Zealand started printing money and lending to our government to build houses and infrastructure, particularly in Christchurch.
Even a couple of years ago this would have been unthinkable to say, even economically treasonous. I'm sure many readers will still believe such money printing is dangerous madness guaranteed to debase the currency, create hyper-inflation and empower politicians to go on an even bigger spending spree.
But we've been here before and right now our major trading partners are doing exactly this. We should at least be talking about it.
Back in the very early days of the Reserve Bank of New Zealand, shortly after the first Labour Government was elected in 1935, the bank lent money created out of thin air to the government and various producer boards. It was used to build state houses and help fund exports of meat, wool and dairy products to the rest of the world.
This first bout of quantitative easing helped pull the New Zealand economy out of the Great Depression of the 1930s, although to be fair, many other policy actions taken by the previous centre-right United-Reform coalition before the 1935 election of Labour helped rebuild the economy and reduce unemployment. New Zealand benefited along with the rest of the British Empire when the British pound was removed from the gold standard and the local economy really rebounded after it devalued its currency against the British pound in 1933.
But the creation of the Reserve Bank in 1934 and the drive, led by Labour's John A Lee, for a state house building drive, saw the Reserve Bank nationalised and start lending to the government.
Fast-forward to the Global Financial Crisis of 2008-2012 and now central banks throughout the Northern Hemisphere are doing similar things. The US Federal Reserve, the Bank of Japan, the Bank of England, the Peoples Bank of China and the European Central Bank have printed a combined US$10 trillion in the last four years and spent it on all manner of bonds and cash injections into banking systems.
This process is known as 'Quantitative Easing' and is often taken as a last resort after interest rates have been cut to almost zero. Many argue it has been ineffective because the money went straight into the banking system and has either been parked there, or was used to pump up the prices of various assets, including shares, gold and the bonds themselves.
Lending this newly money directly to governments to spend immediately on infrastructure, goods and services would have been much more effective. China did this most effectively. However, this is extremely controversial, because it appears to give politicians the biggest free pass to go on a giant lolly scramble. It also only works when it doesn't create inflation.
This is the crucial question that is now being debated by a relatively new brand of economics known as Modern Monetary Theory, which says deficit spending from newly printed money is unlikely to create inflation as long as there are unemployed people and assets such as buildings and machinery sitting around doing nothing.
The Reserve Bank in New Zealand has already said such a quantitative easing could be considered, but not yet because the Reserve Bank has room to cut its Official Cash Rate further towards 0% from 2.5% before actively looking at it.
But isn't it better for our government to be borrowing from its own central bank than from foreign banks and pension funds? Wouldn't it be better employing the unemployed to build new houses and repair Christchurch's infrastructure than to just sit back and let it happen? Wouldn't it be better to print the money to fund the deficit than choose to sell public assets to do it? It would devalue our currency, but is that such a bad thing when we need to boost our exports?
The big question is around inflation. Right now New Zealand's inflation is under control and the experience in Japan is that money printing over decades has not created inflation. It also isn't creating inflation in Europe or the United States at the moment.
Here endeth the heresy and the history lesson.
FYI - I've included a video interview above with Unitec Economics lecturer and economics historian Keith Rankin which looks at that period of New Zealand's economic history of the mid 1930s.