There is no miracle cure says Damien Grant. Money printing is no answer for us. You agree?

There is no miracle cure says Damien Grant. Money printing is no answer for us. You agree?

By Damien Grant

The medical profession no longer drills holes into fevered skulls because science has demonstrated that such measures do not work, often kills the patient and usually leaves a shocking mess in the surgery.

When it comes to economics, however, there is no shortage of amateurs recycling discredited miracle cures: deficit spending and printing money.

Bryan Gould has been complaining that austerity does not work and is no solution to our current woes, he points to Greece, Spain et al, to illustrate his point.

Greece, however, is a mess precisely because they have never practiced austerity. Greek governments used to print drachmas, and lately borrowed Euros. If borrowing money was a path to riches then Greece would be a wealthy country. It isn’t.

Greece has enjoyed two decades of fiscal expansion and is now broke. Like the other pigs in Europe’s sty, Greece gouged too long at the trough of cheap money. Further fiscal expansion is no longer an option because no one will lend her money. She cannot pay back her creditors; the only question is how large and messy the default will be.

This default is a gift to Greece, a modern Marshal Plan on a vast scale, taking from the prudent and giving to the indolent. So how, exactly has two decades of fiscal expansionary policies and a free hundred billion euros worked for Greece? Total failure.

Gould and others then turn to the United States and exult at the recovery, the fruit of several years of massive expansionary expansion, but fail to grasp the underlying unsustainability of this recovery. The United States is employing the same failed policies that ultimately destroyed the Greek economy, it has simply yet to hit the limits of its creditors patience. But it will, or it will impose sufficient austerity to balance its budget. Those are the only choices short of printing money.

The advantage that nations like the United States and New Zealand have is that we still retain significant creditor support, allowing us to employ fiscal expansion during a down turn. What has destroyed Greece is that she employed Keynesian fiscal expansion at all stages of the economic cycle and now has no economic headroom.

Gould, for his part, seems under an illusion that our government is currently running an austerity model. Treasury, by contrast, tells us that tax receipts are a billion dollars lower than forecast and we are running a 13.6 billion deficit, nearly seven percent of our Gross Domestic Product, with no end in sight.  This is not austerity; that is how the Greeks bankrupted themselves.

Central government needs to cut government spending by 13.6 billion dollars, or the diminishing pool of tax payers need to pay more. Twenty two percent more, in fact.

That sounds unpleasant, which underlies the appeal of Gould and Hickey’s solution: printing money.

The easy criticism of printing money is that it leads to inflation but, as Hickey points out, this has not been the case in Japan where the central bank has employed quantitative easing for over a decade with no inflationary effects, and to the United Kingdom and the United States were recent expansions of the money supply has not trigged bouts of inflation or even inflationary expectations.

Why not?

Japan has its own unique problems, the main two being an ageing population and government debt equal to 200% of Gross Domestic Product. A nervous, frugal, ageing population is hoarding a vast reserve of cash. In a reversal of how the Greeks got into trouble Japanese governments first attempted to revive a moribund economy by deficit spending. This did not work but left Japan with a massive debt, so the government began printing money, which the citizens hoarded rather than spent or invested.

The desire to hoard cash in Japan is so strong if the central bank did not print money Japan would be experiencing deflation. Clearly, the issues facing Japan are not relevant to New Zealand.

In both the United States and the United Kingdom programs of quantitative easing have not resulted in run-away inflation but it is not clear that they have led to a recovery either, however it is important to understand the special nature of printing money that is quantitative easing.

The central bank buys assets from the public, let’s say a treasury bond. The seller gets a credit in their trading a bank, and the trading bank gets a corresponding credit in the central bank’s ledger. Because the central bank has entered the market for treasury bonds, the yield for these falls, lowering interest rates. The balance sheet of the banking system is improved because, unlike a private seller, there is no corresponding debit in the purchaser’s account.

In both the United States and the United Kingdom the trading banks were pretty sick before the first tranches of quantitative easing, the effect of these programs was more about preventing a banking and possibly wider economic collapse than reviving their respective economies. It should also be noted that asset prices, mainly the share market, remained buoyant because of Quantitative Easing. Share prices are excluded from CPI calculations.

The mistake Messer’s Hickey and Gould are making is to confuse the effective use of Quantitative Easing to prevent economic collapse with using it to stimulate economic growth.

It is important to remember why printing money worked; citizens were tricked by inflation into thinking that the economy was improving. They responded by spending and investing, causing the real economy to expand, but never as much as the level of inflation created. Once citizens learned that inflation was occurring it was only inflation higher than they expected that could trick them into spending and investing.

Today, however, people like Bernard Hickey ensure that citizens know all about printing money! There is nowhere for Alan Bollard to hide a few billion dollars. So, what will happen if we were to employ quantitative easing in New Zealand?

Two things. Where there are constraints in the economy, inflation. No question. A short-term fall in interest rates will feed into house price inflation faster than a real estate agent can sneeze. Asset prices, all asset prices, will rise. This will mean that those with savings denominated in New Zealand dollars will be poorer, those with assets denominated in shares, property or other affected assets, will benefit.

Where there are no constraints in the economy, such as employment, wages and prices will stagnate. Meaning those people will be poorer relative to those benefitting from an increase in asset prices. There will not be any rush of new spending.

This is a redistribution of wealth, from savers to borrowers, from workers to speculators, from the frugal to the feckless.


Damien Grant is a Herald on Sunday columnist.

A shorter version of this story first appeared in the Herald on Sunday.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

Does anyone know what extent the cut to government spending would need to be right now to avoid any further government borrowing for the next 1 year, and to service the interest on the governments current debt so that the government debt was no larger in 1 year than it is now?
I would be grateful if any one could advise me how big the cuts would need to be, such as what percent cut in funding to health, education, retirement funding etc?

Nice to see Bill English posting on here, anyone care to help him out? (you need not use a monicker with us Bill, we are all mates on this site).

Govt spends about 35% of GDP depending how you calculate it, so they would need to cut spending by about 20% across the board, including wages etc.

well, I think he's right there are is no silver bullet. 
but there ARE a suite of solutions which would make a big difference.
the problem is they involve reversing decisions made by both the National Govt and the former Labour Govt. What chance that incomes taxes will be raised back to what they were (and indeed raised further on very high income earners), that WFF will be significantly reduced, and interest free student loans dismantled? Doubt we'll see either party swallow its pride. The Nats might get rid of interest fee student loans. The reality is unless things got really really bad no govt will increase income tax, that's political suicide. So the Nats helped stuff us with that move
Oh yeah, and because of Key's silly and unfaltering pre-election promise the supernannuation debate is off the cards 

Only 7% deficits?  You mean we have to wait another 10 years for this slow motion train wreck to end?  Hurry up and finish it already.
What we actually need is a cure, not a treatment.  First diagnose the cause of the problem, and address that.  Even though our government follows the tradition of blaming the previous govt, they always fail to address those failings in a definitive way.  Welfare spending gets votes, even though it means a "structural deficit", in spite of the fact that infrastructure spending has a far greater benefit to far more people.  What could we build with the 2billion of WFF payments every year?  2 Billion spent on productive assets, every year would build some awesome stuff.  Instead we sell what little infrastructure we have, in a futile attempt to keep "everyone" happy.

This isn't a bad article, and whoever he is, he's brave enough to take on the talking heads like Gould.
He's also, in a roundabout way, right. I've been saying for a long time, that wages/salaries will have to buy less, and that will happen either via a bidding war over what is left (stagflation?) or via voluntary/decreed reductions.
Growth is off the table.

It's one thing to say Santa Clause only comes to good boys and girls, and another to say Santa Clause isn't real.  In the future wages will have to buy less, be an ant, winter is comming.

When it comes to economics, however, there is no shortage of amateurs recycling discredited miracle cures: deficit spending and printing money.
And the professionals are better?  Or leading the amateurs?

It is a rare occurrence for me to defend Mr Hickey, however Damien Grant's illconsidered refutation of a fundamentally sensible idea (largely based on his personal bias indoctrinated during undergraduate studies of twentieth century economics I suspect) demands a reply.
The argument against governments simply printing money and spending it, is that it causes inflation, which in turn would devalue the currency.
Now the goal for NZ is to lower the currency and reduce government debt.
If the government printed and used the money to reduce debt in a careful and cautious manner, then the inflation risk would indeed be limited - the downward pressure on currency would help the economy and a boost in inflation would be small.  That boost in inflation would actually improve tax revenue and reduce the hoarding and disincentives to invest that may exist at present.
Money printing to reduce debt may disadvantage savers in bank deposits, however bank deposits are hardly the most productive contribution to our economy!  Essentially money printing to reduce debt would be a small tax on ALL money that is circulating in the economy.  Exactly how is this bad for NZ?

so savers are not important, you on the other hand a property speculator, who already had a big win, on the back of the tax payer via the CHCH earthquake handout ,now expect more largese from the state.  You leave me speechless.
 I posted this article over the weekend
That's why in the Western world we have the story of the "Emperor wearing no clothes", it's a allegory about egotistical intellectuals who claim to be experts in statistics but end up making points even children can see are absurd.

Andrewj, you don't seem to understand that if the Government printed and paid back (bought back) debt, then the country is actually the winner.
There seems an obsession that any though of money printing will cause hyper-inflation which will enrich asset owners - this is highly unlikely.
A small amount of inflation is good.  It would spur on those that invest in bank deposits and bonds to invest in real assets such as businesses, equities and perhaps property.
It would also avoid the near zero interest rates where the Government earns virtually no tax revenue because the interest rate is so low.  (ie a 1% interest rate might earn the Govt 0.3%, where as a 6% interest rate earns them 1.8% or six times the revenue for no extra effort).
Silly prejudices against money printing because people think that real assets may inflate in unwarranted.  If inflation goes to high, then so will interest rates, in which case property prices are likely to actually fall not rise.
It's a simple solution.  Print a little while you can get away with it, keep spending in check and our problems will simply melt away.
Even a child can see that there is no logic in skimping to save money when you have the opportunity to create more money without doing any work!  If the only real risk is that our currency devalues by money printing (and currency devaluation is one of our aims) then as long as the printed money is not splashed around the economy (ie only used to repay existing Govt debt) then there is absolutely no risk to the economy - provided that such a policy was implemented with great care.

Whether inflation is good or bad depends on who you are.
If you are poor and the cost of living increases faster than wages it's bad.
If you own assets that appreciate at the rate of inflation it's good.

Do you really believe that currency depreciation is a good thing, if every one with a deposit purchased someone elses debt we would be better off?  Then we would have no deposits backing any loans all the deposits would be assets which return ? Looking back in time, countries with high savings prospered, printing is theft. How would you feel if you lent Australia money and they just printed money ,not backed with anything to pay you back.
 When I left for the States in1980 we were getting $1.10 to the US and my farm was profitable with costs of %30  of gross sales. Today we have  .82 to the US$ and my costs are %85 of gross sales. We are uncompetitive and yet we dont face up to the lie - that we could be, we just need to slice a bit more of the $.
The state having run out of people to tax, run out of people to borrow from, you now advocate the state stealing from every citizen by printing whatever it needs to spend 
You make my point perfectly - there are many like you in the UK who simply have no clue that (a) they are uncompetitive (b) have given up personal responsibility for the choices that they make in favour of the state taking over their lives.
Therefore they advocate what you do - let the state and its central planners spend us into oblivion becasue they know better how to spend money than you do.

Savings are the seeds of productive investment.  Go to a bank with nothing, and thats what you will leave with.  I built my business, thanks to savers, without their rational descision to save, my business wouldn't exist in its current form.  You propose removing the ability to make a rational descision to save, destroying the seed of productive investment.  Wealth is producing more then you consume, money is just a measurement.
Equity finance for productive business is possible, but you still suffer massive haircuts on equity compared to cash.  The equity equivilant of 100k cash, in my case is 200k of equity, in addition to the far higher LVR for the productive sector compared to housing.  For me to make a purchase financed by a bank, I need either 70%-100% unemcumbered equity, or 35%-50% cash.  So the utility of savings for many business is far higher then the utility of equity.  I understand rental property works differently, and the utility of equity is almost the same as the utility of cash.  This is not the case for people that produce stuff.
Savings is important for the productive sector.

If the debt is denominated in USD and the money creation is in NZD the act of printing would not reduce the debt.

If the government printed money and house prices went up. How can you say that printing money was the sole cause?
What about shortages of land?
What about no capital gains tax?
What about banks lending 100% mortgages?
and so on
Are you saying these things have no effect?

Damien Grant hit the nail on the head with this article. It is simplistic and covers  the one most important issue about the western worlds economic woes, the growing unpayable debts, and governments continual attempts to deflect the effects of decades of malinvestment. 
Any one who thinks we have turned the cornor economicly speaking, does not understand the real situation. Economic activity across half the world is being funded by debt, that is now unpayable. We are in a period of deleveraging, return to funding consumer demand of post 2008 is impossible because it was unsustainable. It was demand funded by asset growth driven by easy credit. When the private sector hit the wall, governments socialised the losses and stepped in with borrowing.
NZ may continue down this path for a while yet until the debt mountain gets beyond sustainable. The outcome is inevitable economic disaster. This is certain, you only need to read what politicians are saying, spend, spend, spend from all parties. The Nat's may talk cuts and while they have made some its no where near enough as we are still borrowing!! Governemnet revenue will continue to disappoint, we may have the odd quarter thats positive and will be grasped as evidence of a turn around, alas it will be a mirage.
The next few decades will be about protecting ones wealth, the best we can hope for will be muddel along economics, which may or may not result in a major crash. The economy is like an alcoholic and liguidity is the alcohol, pull the alcohol and it will get nasty. Keep it going and the liver will fail.
Keep you wealth away from where politicians can influence, global trends, buy cheap and hold. In a crash everything will go down, but a global trend will insure a fast recovery.
Use the high value of the NZ dollar to spread your risk out side the country, this is a hedge, dollar goes down you win, long term the NZ dollar will devalue as NZ joins the rest of the debt loaded west.

Just watched a commentator on Bloomberg predicting the US dollar will appreciate in the near term, so assets outside the country could well be a wise move.

lots of predictions...many seem to think the USA is bulletproof...usually the USA itself...

and so it goes on....Shows a mis-understanding or willful misleading of keynesian economics, almost certianly the latter...Greece for instance didnt save in the good times to have money to spend in the bad, it simply spent beyond its means all of the time.....voodoo economics....not keynesian....same can be said for the UK, also misses the biggest problem....private debt....Ireland ended up in deep doo doo not due to Govn spending.......but bad private spending.....and this is what will send us into a global depression....

J.M. Keynes in the tradition of all great economists "I am the only one who is right."

Damien is the one needing the surgery....what a dead end dream of his...The currency is already being debased 30 to 40% every ten he blind to that...and what good comes from it...none.
The path out of this mess is a very very long one and unfortunately the poiticial system demands quick pork slicing answers because most Kiwi are now trapped in a culture of greed as the property bubble credit splurging disease eats deeper.
The size and cost of govt must be slashed. The bloated half million dollar handout salaries are way out of line. Too many doing the same make work jobs. Just look at the billion plus a year that Treasury sucks down...
The power and control of the banks has be confronted by a govt with the guts to fight them.
But none of it will change bar the tinkering tweaking fiddle which will die away as nov 014 approaches. So buckle up fellow peasant because from here on the ride gets real awful....welcome to the insane future where bankers rule and rulers do what they are told.
Psssssst  anyone wanna fat cheap friendly bank needs you!

You have to increase income, decrease expenses, or a combinantion.  Simplicity itself.  Random noise about creating more money is just a load of nonsense.
Sometimes we just need to learn the hard way, lets get the party started.  The keynsian daydream started during the Great Depression, and the stimulus never stopped, it just increased, are there limits?  Lets find out.  The planet is insolvent anyway, we don't have enough resources to continue for much longer, mother nature doesn't care about economics.

1.  Are you suggesting all government monetary policy has a zero net effect on an economy?
2.  Ignoring that a planet in and of itself is not an economic entity that has debts...
IF -- we define insolvency as meaning unable to pay ones debts -- AND -- we accept the premise that the planet is a closed economic system (no debt exists to anyone outside the planet) -- THEN -- a planetary economic system cannot be insolvent.

1 Govt policy has an effect on the economy.  Long term and short term, in my view the long term has a far higher value then the short term.  Though I'm not elected for a 4 year term.
2 I refer to the planet as a closed system, without regard to fiat dollars of meaningless worth.  Our liabilities are our current lifestyle, and economic system, our assets are the earths resources that we consume to meet our liabilities.  Balance sheet insolvency.

Jeez I got the PMs dept on the blower..they want you as well...double dipping're made.

In this article Damien Grant shows he clearly knows less about economics than your average economist,
"It is important to remember why printing money worked; citizens were tricked by inflation into thinking that the economy was improving. They responded by spending and investing, causing the real economy to expand, but never as much as the level of inflation created. Once citizens learned that inflation was occurring it was only inflation higher than they expected that could trick them into spending and investing."
Friedmans monetarism puts this idea at its very centre, and idea which didn't even function property when it was tested in a non crisis situation.
Further to this history has provided a second test of Friedmanomics allowing his theory (that the great depression was essentially caused by Fed policy) to be tested in practise by Mr Bernanke, showing quite clearly that Friedman had it entirely wrong.
In making his case, Damien Grant is essentially trying to argue the ridiculus proposition that un-regulated financial markets are themselves stable.
Damien also levels the claim that few legitimate economist agree with Bernard.
Paul Krugman,
Joseph Stiglitz,
Michael Hudson,
Ha-Joon Chang,
John Harvey,
Steve Keen (who may have accidentally read what Keynes actually wrote),
and obviously James Galbraith and John Galbraith,
I think the last is the best critique of the re-marketing of Monetarism. Reach for your wallet, making the financial system beyond reproach would be too politically easy for some people.

The piigs have had their day at the trough and are now turning on each other, this will not be a fair fight as many have already gnawed off their front legs.

Is it possible some Greek pollies at the table, bet on a greek default...and are this very minute counting their millions...stashed in Swiss accounts...who better than those cracking down on tax evasion and fraud...hmmmmmm

There is a big difference between New Zealand and Greece that substantially weakens Mr Grants comparison.  New Zealand is not trapped in a money union without control of it's currency like Greece is.

I thought it was a good article.
Within this debt based system, austerity is not the answer, and stimulas is not the answer.  
The best we can hope for is for is that the wizzards borrow just enough so we don't fall into a deflation spiral and not too much that inflation takes off.  
Of course the further along this path we go the more precarious it gets and the more debt we all get into untill ultimately it all falls over one way or another.
We need a new honest monatary system.