The next QE will be different

From Citi via FTAlphaville:

We now think that the move to central banks endorsing fiscal policy and essentially monetizing the added spending will be relatively quick and direct, in the event of a sudden slump in the global activity. When we wrote earlier on this subject we arrived at fiscal after other alternatives had been exhausted {link}, but we now think it can be managed within the current monetary policy framework of most central banks.

The argument for fiscal policy via central bank monetization is that it directly injects purchasing power into the economy and will increase activity or inflation or both. QE increases the balance sheet but there is no guarantee that the increased lending and spending will result. In consequence many have argued for true helicopter money which is central bank financed final demand, rather than reserves creation.

Our ‘innovation’ here is to suggest that central banks will invite fiscal spending by announcing that their balance sheets will stay expanded permanently, or almost equivalently, be reduced only under extreme circumstances, and that they anticipate additional permanent expansion if targets are missed. Effectively this eliminates the government debt from the balance sheet, since any coupon payments on the debt are remitted back to the government via central bank profits. Literally the government is paying itself, which is not a bad deal if you can manage it. Many central banks are forbidden to monetize government debt, but governments will understand that permanent balance sheet expansion is an invitation to spend more, opening the fiscal channel.

If the government understands that the CB’s QE is permanent it opens the door to direct fiscal measures and increased demand. Congress may have different ideas on the virtues of additional spending, but they could be tempted by the prospect of Fed-funded tax cuts. There is nothing that forces fiscal policy to be highways and bridges, rather than low personal or corporate tax rates. There are plenty of Republican tax cutting proposals that rely on economic expansion or animal spirits to close the fiscal hole that the tax cut brings (for example). Combine such a proposal with balance sheet expansion and you have big-time money financed fiscal stimulus. Essentially you are combining Paul Krugman fiscal with Republican tax and Bernanke 2002 {link} monetary. Government spending and infrastructure could be used as well, but it is important to understand that fiscal expansion is not synonymous with government spending.

The announcement that the central bank portfolios would remain permanently enlarged could have an immediate effect on inflation expectations, in addition to any impact on real expected interest rates from anticipated fiscal spending. Low policy rates at the front end and balance sheet expansion preventing the fiscal injection from pushing up medium-long term rates are a powerful stimulus combination ( I think this was Jacob Viner’s recommendation during the Great Depression). The fiscal spending means that monetary policy is pulling rather than pushing on a string so it makes both policy tools more effective.

The rates effect is very likely positive at the medium and long end as expectations of growth and inflation rise. To get the maximum activity and inflation boost the central bank may have to keep policy rates low or zero, so that short-term rates become negative relative to inflation expectations. This introduces some ambiguity into the currency effects but we think that the prospect of normalizing activity and hitting policy targets will be currency positive.

There is the possibility that this ends up as an activity negative if the fiscal easing is promised, but not implemented, as rates would rise, effectively tightening monetary policy, without the boost form fiscal. So generating expectations without follow-through is dangerous.

We view this note as both positive and normative. The positive side is that it discusses how central banks are likely to respond if they face a negative shock when rates are already zero, and even they must be having some second thoughts on the effectiveness of QE. The normative side is that increasingly the absence of fiscal policy is viewed as one of the reason for a less than satisfactory recovery and we outline a practical way by which central banks could endorse fiscal policy without fully dropping the idea of independence and non-monetization.

Yes, yet the political opposition to this will be immense and in some ways understandably so. I can see Japan doing it but the US where private capital allocation is sacrosanct?  If not handled right it would also be one enormous rent seeking hog trough. To do it right you would you would need to hand over the printed investment decision function to an independent technocratic body.

The impacts on markets would also be very different with some real impact in the economy at last and much less impact on financial market inflation. You may not, therefore, end up with more growth but it would certainly be of better quality (assuming it is not squandered on bridges to nowhere).

Houses and Holes
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  1. Yup…those impartial, technocratic bodies have certaintly held fast against criminal rent seekers like Citi to great effect so far…the logic for Qinf seems clear


  2. It is early days and there will be a fierce debate as those who prefer to have ‘money creation’ conducted by private banks and directed to asset prices will do the usual (insert hyperinflation example of your choice) routine.

    But it is not really a debate as there is no choice.

    The mathematics of P + I are simple and compelling. In order to repay both P + I (whether public or private debt)the money supply must expand and that means someone must create the expanded money supply.

    Over the last 20 years the ideologues who are opposed to ‘democratic institutions’ involvement in the economy insisted that the power to create money should be restricted to private banks lending money. That is why they bang on about governments running surpluses or balanced budgets – as when a govt does it, by definition it is not creating new money. 20 years ago the reasoning kinda made sense let the market (private banks) allocate capital (new money) rather than govt and pollies.

    RBA ‘independence’ is merely a feature of this failed experiment in privatising control of the money supply.

    But as we know the ‘theory’ did not work and what happened was that private banks largely directed the new money to the unproductive purpose of speculation on asset prices. And no amount of wealth effect was ever going to solve the problem of repaying P + I. As the mountains of debt grew higher they constituted a debt deflation death ray sucking money out of the economy faster than it could be replaced by new loans.

    Even if demand for new loans slows – debt mountain starts to plateau – the deflationary effect of all the interest on existing loans does not vanish and unless debt deflation is your cup of tea the money required to stop it must come from somewhere. This is not about producing inflation it is simply about avoiding debt driven deflation. It is about providing the I in P + I.

    The best approach – because it dodges the claims of big govt socialism coming back – is to continue to limit govt to a tight role focussed on providing what would not otherwise occur and create the deficit required to offset debt deflation by cutting taxes on an equitable basis – say by increasing the tax free threshold on earned income.

    As out right monetisation will set off the anti-govt types, the deficit must be funded by issuance of a bond by govt to the RBA. Everyone knows issuing a bond is legitimate – and call it something sexy like.

    “Golden Kangaroo – Sovereign Nation – Non-Transferable 0% 10 year bond”

    Zero % interest prevents a new stream of I deflationary pressure and at the end of ten years the bond can be ‘repaid’ by issuing a new one or if there is some inflation – by actually repaying it.

    An added bonus is that as all new govt bonds can only by held by the RBA they cannot be sold off shore and thereby inflate the exchange rate and help drive a CAD. Banning wholesale borrowing offshore mortgages will also help but that is for another thread.

    • pfh
      You ain’t gonna sell bonds at 0%. People is gonna spend. Negative RAT does not fix debt – it results in increased debt – that’s exactly how we got to where we are.
      I is covered by ‘growth’ The idea that, I always and everywhere, interest creates a liability that can never be repaid is false. As you rightly point out our problem is all the mis-allocation which has resulted in non-productive/consumption expenditure. However that will not be cured by having even more NRAT IR. Nor can all the mis-allocation merely be turned magically into productive assets merely by the elimination of I.
      It’s the biggest fallacy of modern economics that somehow economics and monetary considerations are totally removed from all contraints of, or effects on, our social, physical and environmental world.

      I note you are the only one in this whole bloody schmozzle that even begins to consider the effect on the external account.
      I presume everyone is quite comfortable with us selling what little remains of our childrens’ future off to fund out never-ending insatiable need for more and more consumption.
      everyone, including those who write so prolifically about ‘climate change’ are comfortable for this plan to use up our world at an ever faster rate!

      • Flawse,

        You need to read what I wrote again as nothing is inconsistent with your concerns about negative RAT. In fact you will get positive RAT by controlling capital inflows.

        Just because the govt is printing money (which is what the zero % bond is really doing) does not mean that anyone else gets free money. The govt can always sell a zero % bond to the RBA because it will direct it to buy them! They cannot be resold by the RBA.

        If the govt abuses the power and inflation results they can hardly hide from that. Anyway, what is the attraction in the massive inflation in asset prices and also some in CPI that results when banks are creating most of the new money.

        You are wrong about interest. Repaying interest is inherently deflationary – I don’t have a problem with deflation as the hysterics about it always come from the debt peddler economists (deflation kills demand for their products but they pretend the issue is people delaying purchases) but most would agree that stability is preferable.

        One thing I should have mentioned is that if govt is taking responsibility for the money supply the banks ability to drive it must be removed as otherwise we will get the banks doing their usual pro-cyclical schtick of driving massive new lending (new money) into booms and sucking money out during busts.

        Bank money creation and money destruction has historically been the greatest cause of booms and busts. There is definitely a role for private banks but only as financial intermediaries and NOT as money supply creators. If they want to issue IOUs they can but they should not be treated as if issued by the govt.

      • Flawse,

        But having said all that there is plenty of cause for concern.

        What is most likely is that there will be some form of QE for the People (i.e. getting new money in the hands of people who will actually use it) but the private banks will keep their power to create money.

        In fact what is most likely is that the banks will start pumping up lending (money creation) into the recovery produced by QE for Struggle Street and that will produce a boom and inflation. Their pet economists will then blame this on QE for Peeps and everyone will nod their heads and mutter about govts spraying money around.

        Another very real possibility is that QE for Peeps may instead become just an immoral debt jubliee or QE for Debtors. Where the QE is given to debtors to help them pay off their loans and no one else gets a cracker. Another appropriate name would be QE for Bankers Bad Debtors.

        Here is a longer discussion of these real dangers.

      • pfh

        I am not wrong about Interest – it is the the way it is now generated and used. If you think about our correspondence I think you’ll find we agree – difficult here in such a short narrative. If money is not just ‘created’ for expenditure but instead has to be gleaned from somewhere else then the interest is a zero sum game. On the other hand if you create money from nothing, have NRAT interest rates that results in CONSUMPTION without saving then you have a major problem on all fronts – monetary, economic, environmental and social (note the quote from Mauldin – it just requires and old Aggie to make the connection to the real physical environment 🙂 )

        Now as to the govt selling bonds to the RBA at 0%. Unless you soak up the money in the private sector, with higher rates, then the government spending does ends up in the external account. However if you have those higher rates in the private sector you are going to have a government running amok because it can glean infinite money at 0%.
        You would end up in a whirlpool of decreasing private investment requiring ever more increases in Govt expenditure to plug that gap!

        There IS no magic solution. We ALL need to take a hit to our standard of living. How that is to be achieved is the conversation we should be having – not inventing fairy go-mother appearing and waving wands. The reality is that money has been abused. The environment has been abused. Our childrens’ future has been abused. Our social system has been abused. Our rural people have been abused. our productive people have been abused. Our prudent people have been abused.The profligate and non-productive have been fabulously rewarded. None of that can be cured by turning the RBA into a Magic Money Tree. it just makes the problem worse.

      • Flawse,

        Paying interest can never be a zero sum gain as the money for the interest has to come from somewhere and that increases the demand for money, which makes it more valuable and thus is deflationary as the prices of goods in terms of money starts to fall.

        Generally we are not used to this process because between banks creating money and govts creating money it is more common to see inflation. But when debts are huge, demand for new credit is slowing and govts are trying to be ‘fiscal conservatives’ deflation becomes a possibility.

        The strength of the debt deflation forces at the moment are demonstrated by the fact the govt has been cranking out massive deficits since the GFC and credit growth is still positive yet there is little inflation.

        The debt clock makes it clear how this could be happening. With 2.4T in private debt ($1.6T in household debt) we are talking about an interest bill EACH year of $120B assuming 5% interest.

        That is just private.

        You are quite right to be concerned about the CAD and capital inflows. Unproductive capital inflows (example foreigners buying govt or private IOUs that are are used to fund consumption or pump house prices) push up the exchange rate beyond what our trade performance warrants and thereby ENCOURAGES people to buy imported goods because they are now literally cheaper.

        Our trade deficit and lack of competitiveness is a result of those unproductive capital inflows and the transactions that constitute those inflows should be heavily restricted.

        Productive inflows (which add to the productive capacity of the economy) are another thing altogether.

        But provided the unproductive capital inflows are restricted I cannot understand your objection to removing the private banks power to create money and return it to either the government or some body that determines how much is required to maintain stability and who then leaves it up to the govt whether it will acheive the target by increasing or reducing taxing or spending.

      • pfh – in teh world we advocate I save! You borrow and invest invest! You pay me $100 interest. I get $100 interest – total = zero.
        Now that is not how the world works at the moment. However, in the intersts of trying to create a socially and environmentally stabke world we have to head towards such a model somehow!

      • “Generally we are not used to this process because between banks creating money and govts creating money it is more common to see inflation. But when debts are huge, demand for new credit is slowing and govts are trying to be ‘fiscal conservatives’ deflation becomes a possibility.

        The strength of the debt deflation forces at the moment are demonstrated by the fact the govt has been cranking out massive deficits since the GFC and credit growth is still positive yet there is little inflation.”

        Certainly the old monetary belief that money printing WILL result in consumer inflation was wrong! it will result in either or all of CAD/Consumer inflation/asset inflation.

        Importantly nobody seems to look at the overall real picture of what happened. The ASsian tigers and then Big mama China happened during the same period where more and more it became accepted that CAD’s and accompanying foreign ownership no longer mattered. So we can run unlimited imports of cheaper and cheaper goods meanwhile shutting down all our own ‘expensive’ production.
        So the more you print, the more cheaper goods you import thereby lowering inflation.

        Of course there are other factors at play as well but this is an important one. The end result is of course you get more and more money available for non-productive and inflating assets.

      • pfh
        “But provided the unproductive capital inflows are restricted I cannot understand your objection to removing the private banks power to create money and return it to either the government or some body that determines how much is required to maintain stability and who then leaves it up to the govt whether it will acheive the target by increasing or reducing taxing or spending.”

        If you cut the capital inflows Banks CANNOT create money – at least very little. Their ability to create money would be restricted to the growth rate of the economy. – just maths mate – nothing ideological.

      • Flawse,

        “…If you cut the capital inflows Banks CANNOT create money – at least very little. Their ability to create money would be restricted to the growth rate of the economy. ..”

        Sorry Flawse but that is just wrong.

        There are no reserve requirements in Australia. The banks can make as many loans as they like provided there is demand for them and subject to whatever piss weak capital requirements APRA requires – very piss weak when it comes to housing.

        The only relevance of capital inflows is that a foreigner who acquires AUD deposits will accept a lower TD rate than saving shy locals. This means the banks can meet their APRA capital requirements at lower cost and they can pass that on as a lower loan rate – which they are keen to do as lower rates stimulates demand for loans.

        If the capital inflows for such borrowing by our banks were restricted it would have NO effect on their ability to make $AUD loans. The rates on their mortgage products might go up but the RBA can always offset that by cutting the target rate.

        The reason RBA and APRA prefer the banks to use off shore lenders (up to a point) is that they do not have any effective mechanism for building local deposits directly such as would result in the same effect as when foreigners acquire AUD deposits. Getting locals to ‘save’ after they have been trained not to is a challenge.

        Foreign lenders are not essential but they result in lower mortgage rates for a given RBA target rate.

        But, and on this we are agreed, at a very high price – an inflated exchange rate that makes us less competitive and helps hollow out our productive parts of our economy.

      • The theory of a close economy is not the same as an open economy. Printing money will cause people to lose faith in the currency and lead to capital flight. Whether the debt is private of public does not matter : when you allow someone to create money without the promise to pay them back, the whole economic model will come crumbling down.

      • Ronin,

        “…Printing money will cause people to lose faith in the currency and lead to capital flight…”.

        One of the key, though unstated, objectives of US and Japanese QE was to drive capital flight by driving down rates – and thereby drive devaluation. The value of those currency were being openly manipulated and yet investors appeared to be able to cope without losing their ‘confidence’.

        It is one of the great myths that ‘capital will flee’ simply because a govt is responsible for the money supply. Especially when in an interest rate targeting regime a government deficit almost always involve some printing to prevent govt ‘borrowing’ pushing up rates.

        What investors are concerned about is government being IRRESPONSIBLE with the money supply.

        A government that limits banks to acting as intermediaries between savers and lenders and that contrains expansion of the money supply to target stability in value could not be more responsible.

        Arguably the current model of TBTF banking with banks pumping new money into asset prices and booms and then sucking it out during busts with opaque prudential / capital adequacey monitoring is the ACME of economic irresponsibility.

      • “Sorry Flawse but that is just wrong.”

        It is NOT wrong. I’m NOT talking about reserve requirements. i’m talking about what, at a macro level, is what is mathematically possible. Do the maths and follow the flows. If you create money the government has to soak it up with higher taxes or it goes to teh external account. So then we are not allowing it to blow the external account so government must raise taxation accordingly or the banks cannot print the money. Just facts. Again all this with the proviso of a small increase in M3 and you aren’t allowing inflation to just run amok.

      • re : Pfh007
        Investors looks for 2 things : safety, and profit. With a 0% bond and a falling AUD, they have neither, so both domestic and foreign investors will flee the country. This is relevant because Australia must find a way to pay for the 560,000 barrels of oil we’re importing each day. (along with everything else like cars, flat screen TV and iPhones).

      • Ronin,

        “..Investors looks for 2 things : safety, and profit. With a 0% bond and a falling AUD, they have neither, ..”

        Huh – why do they not have ‘safety’ ? No one is suggesting any property rights they hold will be threatened. If you are inferring that a govt will devalue the currency and thus the value of any local assets they own – how is that not already a risk with the current monetary model where banks can create as much money as they like subject to capital requirements actually policed by APRA.

        No profit? Why would they be unable earn profit? The AUD has risen and fallen dramatically over the last two decades and foreign investors have had no difficulty earning profits as their continued presence in our economy confirms.

        As for being able to pay our oil bill that is the least of our problems and we still export more than enough to cover our oil consumption.

        What is much more likely if we impose restrictions on capital imports is that we will consume far fewer of the imported goods we can and will readily produce locally if the exchange rate is not inflated with the proceeds of selling assets and IOUs.

      • Flawse,

        “..If you create money the government has to soak it up with higher taxes or it goes to teh external account. So then we are not allowing it to blow the external account so government must raise taxation accordingly or the banks cannot print the money. ..”

        Banks create over 90% of new money. Govt creation is limited to whatever deficit they run. The RBA seeks to manage inflation by using interest rates to influence the demand for loans and thus new money creation. In the rare circumstances that a govt runs a surplus that reduces inflationary pressure.

        None of that has anything to do with the external account unless we choose to let it and by that I mean allow external demand for local deposits (related to asset sales or IOU sales) to push up the exchange rate.

        When the exchange rate is inflated beyond what our trade performance warrants as a result of asset and IOU sales, foreign goods are cheaper and therefore more attractive. It is not surprising that a trade deficit results.

        There is nothing about this that places a limit on the loans that a local bank can make. Sure if they create lots it will devalue the currency but that will help the trade balance not worsen it as a lower value AUD buys less and import competing local goods appear cheaper.

        The only limits are APRA’s capital requirements and the RBA manipulations of the demand for loans using the target rate.

        As the last decades exploding CAD and foreign debt demonstrates the external account is not a significant factor in RBA or govt decision making despite any expressions of concern.

        Running the country on credit and asset sales is bi-partisan policy and that is why both sides are quick to run scare campaigns about ‘capital flight’ even though we have no need for foreign capital as a wealthy developed country.

        What ‘capital flight’ would mean is that our exchange rate would drop to what our trade performance warrants. Sure we will initially notice the effect of not living on credit and asset sales but pretty quickly we will realise that producing attractive goods and services is a prerequisite to consuming them.

  3. “This introduces some ambiguity into the currency effects but we think that the prospect of normalizing activity and hitting policy targets will be currency positive.”

    As long as your economic time horizon is about as long as where your finger reaches up your nose!

  4. We are early in the game yet, once you step through the looking glass you are in a different world. There is no going back, we will find out why Schacht and Havenstein couldn’t stop printing ever higher denominations of banknotes, but this time in a digital world.

  5. ” political opposition to this will be immense”

    What about the opposition from people who are applying good sense and an economic analysis that doesn’t require the fairies at the bottom of the garden to be included in the model?

  6. P.S. I’m not denying that this is what these f…wits are going to do – I think it is pretty spot on! They’re desperate and have no other option!

    • You are missing the point flawse

      Capital flows are a separate issue

      The main point is that currency issuing governments do not need to sell bonds to fund their own spending

      That it has taken Macrobusiness and most of the rest of the world so long to finally reach this conclusion is staggering but is testament to the insidious power of propaganda employed by the finance industry

      • “Capital flows are a separate issue”

        BS!!!!! The spending of printed money whether gfrom the public or private sector has an effect on the external account – in our case resulting in a greater CAD that HAS to be financed somehow. We finance it by selling off our childrens’ future. We’ve been doing it for 60 bloody years so I suppose why not accelerate the process and get it all over and done with!!!!

        Why can’t you think this through?

      • What rubbish

        First, this does not have to occur in isolation. There is this crazy socialist thing called “regulations”. They might be useful

        Besides which I’m not sure I follow your logic
        More Australian dollars in circulation means a weaker currency means less purchasing power (note that debts are in AUD)

        How does this cause a blowout in the capital account?

      • Right …So you are now advocating that, as per pfh and I arguing for so long, it is necessary to shut down the stupid capital flows?
        Then how the hell are you going to cope with the massive unemployment that will result from interest rates at extremely high levels – and don’t tell me print money. We cannot all at the same time maintain the current consumption economy PLUS try to create massive investment without a severe increase in teh CAD. As I say if you are advocating throwing the current consumption economy to the wolves i’d agree that is what is necessary but the social disruption will be enormous and a ‘disaster beyond your imagination will occur’

        THINK – What comes first? The decline in the A$ OR the payment for imports? The fall in the A$ is NOT caused immediately by printing money unless you announce that you are going top print to infinity and will never again worry about inflation (- which of course of itself would cause a blowout in consumption expenditure and imports)
        The decline in the A$ is caused by pressure on the buying and selling of the currency in the market place.
        Now if you print (again i don’t give a RA whether it is private or public sector printing) that money FLOWS and it doesn’t stop flowing until it reached a final destination. So either or all of the following combination will happen (in THIS economy) as this plays out to its end. You will get a minor increase in M3. You will get a major increase in imports (given the structure of the economy). You could soak it up with high taxation but then what would have been be the point?
        There is nowhere else for the money to end up no matter how you spend it. You go build a beef road in Central Aus the money will be a biut slower ending up in consumption expenditure but you will get an immediate effect on imports and the CAD anyway. (How many dozers trucks and road making machinery pieces do you think we manufacture? How many 4WD’s etc)
        SO your printing requires immediate financing.
        Now how to do that? Sell off other assets to foreigners? (Which as before i hope we are now starting to get agreement that this is not and never has been a good idea?)Or raise interest rates so that we generate savings that flows over into an effect on the external account i.e. less imports. To do that we need a substantial increase in our interest rates.(Again this requires a total change away from totally open capital markets and FFFFEFR)
        IF you announce the closing of the free for all in teh capital markets I reckon you’d have an A$ at USD 0.20 in no time – virtually overnight! You’d also have interest rates at 20% overnight. Now announce wild unfunded government expenditure on top of that – what do you reckon the effect would be.

  7. “assuming it is not squandered on bridges to nowhere)”

    Yeah – squander it on bridges and rail lines in Sydney and melbourne so the ‘centres of population’ can get to the shops faster and regulators can get to work more quickly so they design more legislation even faster to shut down the productive sectors of the economy that exist outside Sydney and Melbourne.

    The point is that what we DO require are some bridges to nowhere! Effective expenditure will necessarily look negative if assessed against this current wildly misallocated economy – that is just a simple FACT!!!!!

      • If by a negative impact you mean drives up land prices to the detriment of the rest of society, then I’m on the same page as you SaCo.

      • Sure Flawse,
        I figure that if you build medium speed rail infrastructure and improved freeways around Australia’s major cities allowing people to live much further out. What is now a 2 hour commute turns into a 45 minute commute the cities can suddenly cover a much larger area. Many may choose to live even further out putting downward pressure on land values closer in to the city. Currently with increased congestion locations which used to be a 60 minute trip away now become the 2 hour commute increasing the attractiveness of the closer suburbs.

  8. Rubbish

    The exchange rate will take care of that mostly

    Additionally, regulation (remember that old thing?) can and should be used in conjunction

    How bitter all this socialism must taste

    • Coming

      You make it sound so simple and it seems as if you are supremely confident. But as nyleta rightly stated this is a step into the unknown.

      Recently published data showed a drop off in foreign owned Australian debt from around 75% to around 60 odd % this was a very quick adjustment I might add.

      Would not (a question) a whiff of the above QE concept encourage a significant flight from all things AUD, public and private?

      I am not deriding any of the ideas, but I don’t understand how the world will remain ‘ceterus parabus’ while we print. Also the other key that is missing is that it might be very remotely possible if we had net foreign assets and not suffer from chronic CAD. How will this initiative impact investment in productive industries?

      • tony I haven’t done the maths but I am guessing that drop-off in percentage is not an actual decline just a decline in the % of the total that has grown substantially.

        NOTE even more importantly – that % drops if you sell off our assets to foreigners which clears some of the debt. In isolation it is a meaningless number.
        It’s what we do!!!!!

      • tonydd,

        One thing that seems to be causing some of the confusion is that people do not understand that we are ALREADY printing money on a massive scale. That is exactly what the banks do when they make a loan.

        That is why house prices have risen so far and continue to rise. The banks are literally creating the money that is being driven into housing. The problem is that it is an extraordinarily inefficient and inequitable way of getting new money out into the economy.

        The question of flight from the Oz economy is best considered from the perspective of what is likely to scare an investor more – an economy sinking into a debt deflation recession or an economy that is active and growing.

        As for the value of the exchange rate – it is has been over valued for decades as a result of our enthusiasm for selling off assets and claims on our future income. We should not be afraid of unproductive caputal inflows flying away – we should be chasing them away!

        Moving the responsibility for creating money away from the banks will ensure less money pumped into asset prices that drive up the cost structure and more money circulating in the broader economy. Of course it must be managed carefully so the value of the currency is kept stable but that is going to be much easier without banks pouring new money into booms and sucking it during busts.

    • “How bitter all this socialism must taste”

      Don’t be a moron! I’m not arguing about how anything should be allocated – that’s a political and social decision and a conversation i have been advocating in these pages since square one. I’m arguing about the actual economic mechanisms that come into play.

      • @flaws
        Yes I thought at the time it must be a debt for equity swap, or it would have caused an IR / bond rate spike. And you are perhaps correct, a change in the change.

        On the topic of change I was wondering yesterday after the stock market (AU) collectively lost 30 Billion Dollars. What AUD volume of sales net of purchases occurred to effect this huge loss. So what I am asking, is there a formula for assessing the effect of net marginal sales on total stock value?

      • tony- massive question eh – if i understand your intent.! So complex that any model would end up wildly inaccurate I’d have thought.
        I’ll go this far – this keeps happening this economy is going to shut down. The world of SME’s outside building, car sales and Real estate is just a total disaster at the moment.
        Imagine what is going to happen when/if people, in two years time, in amongst the value of their house being 20% or 30% or…???? less than it was their Super is also now worth only half what it was?
        Throw in tradable inflation possible running at 20% or higher.
        I don’t know the future (or i’d be rich) but this is a possible, perhaps probable? scenario.

        So in this case your drop in assets crushes sales not crushed sales causing drops in values. Of course it is actually a self-reinforcing loop to hell!

      • To do it right you would you would need to hand over the printed investment decision function to an independent technocratic body.

        There’s the rub. You can imagine the shenanigans involved in getting ‘your man’ into that body! Humans are too corruptible for this sort of model.

    • Just thinking about this, if the money is used on an Apollo-sized project to research renewable energy or perhaps implement the infrastructure for renewable energy, it could be a good thing. Abbott would have used it to build more roads and airports = bad. 🙁

      • R2M Don’t matter what you spend it on – you have to finance it somehow. You have to finance all teh imports assocdiated with teh project – technology, machines, mechanical plant, the tradies new ute, the tradies new drill, the fuel (hehe!), then the tradie’s new TV and his wife’s new shoes etc etc etc etc You create a debt a debt in the external account. Whether it is a profitable use is another matter. I’m just arguing about the idea that printing money is free money …it ain’t.

      • On this I agree with you for once, flawed. But since we’re going to hell in a handbasket economically anyway, we may as well spend the last dregs of money borrowed from the future on something worthwhile. 💡

  9. I firmly believe this will happen . QE for the people is coming . 99.9% of people have no idea about monetary economics .
    The system is dead as it stands but we cannot underestimate the determination of our Noble lords to so whatever it takes for survival – the alternative is revolution and civil war when the system crashes .
    The elites are capable of anything as we have witnessed , currently pushing wW3 against Russia , not satisfied with destroying Iraq for a lie then inviting a 1,000 year old Sectarian bloodbath .
    Adding an extra zero to a bank note or printing to build bridges to no where and concrete river beds Japan style will be decided over lunch for these cats

    • I am yet to hear a better suggestion than Steve Keen’s debt jubilee.
      Give everyone x amount of dollars with the proviso that if you have debt, the money must go towards debt.
      Anything that drives down private debt is good in my book.
      Of course this is rather pointless without other macropurdential but it also seems like a way of selling macroprudential.

      Another form of QE could be the basic allowance given to all adults that Janet mentioned on a post yesterday.
      – it brings money into the everyday economy, which the US QE failed to do.
      – acts like a tax break for those who are earning.
      – goes some way to alleviating poverty for those who are not.
      – increases the net disposable income .
      – Gets rid of Centrelink and associated bureaucracy. (A horrible, humiliating and dehumanising experience for both the people that rely on it and the staff)
      – Gets rid of all those leeching job-find groups (Sarina Russo, and the Salvos and what not. The intention is good, the staff try, but they are just businesses run for the government handout associated with a name on a book.)
      and I’m sure that others could add to the list.

      When I look at a lot of the objections brought against the above two ideas they seem to related to moral objections, not to whether it would work.
      This reminds me a lot of the arguments against lifting the prohibitions over drugs.
      I wouldn’t encourage people to be irresponsible with drugs, but the damage inflicted upon society is undoubtedly greater with our current system than if we lifted prohibition. (See Law Enforcement Against Prohibition and the excellent book ‘Chasing the Scream’.)
      I also wouldn’t advise folk to spend all of their time doing whatever it is A Current Affair and Scott Morrison think that the unemployed do with their time, but the current system, and suggestions for change will only make things worse. All because of a moral judgement upon what is good and bad, not what actually occurs when certain rules and systems are added and removed.

      • I’m also coming around to Steve Keen’s brand of Debt Jubilee. What ever the case, the debt needs to be wiped out either through inflation (SK way) or straight default (Austrian way).

        There is way too much debt money and not enough actual productive assets to back it all up.

  10. What the hell is that meant to mean ?

    What is even being said ?

    Absurd levels of abstraction and linguistic obfuscation in a gossamer attempt to veil Keynesian ?

    Fiscal shift from Monetary ? Budget ?

    What the actual FCK?!

  11. What BS policy is this? So just confiscate wealth of the masses through stealth inflation and spend it on more malinvestment so you can goose the GDP number? Tail wagging the dog much?

  12. The Citi article scared the sh*t out of me.

    The MB comments both fascinated and scared the sh*t out of me.

    There are some smart cookies both on the MB team and in the comments…. and yet what each advocates as the way forward are both wildly varying yet equally extreme.

    What scares the absolute beejeebus out of me is the fact that the people that are actually going to have hands-on-the-levers decision-making power concerning how to respond to this enormous problem are politicians – generally speaking orders of magnitude less bright and also fettered with all kinds of vested interests.

    This aint going to end well.