Mr Leon Berkelmans, Senior Manager in the Domestic Markets Department at the RBA, began the great softening up process yesterday:
The Reserve Bank is not planning on engaging in quantitative easing anytime soon, so please do not form the impression that at the next board meeting they will be discussing it. They will not.
But, just as a thought experiment, the bank would need to buy securities.
Suppose that we wanted to engage in episode of quantitative easing that would result in the bank’s balance sheet going up as much as did the European Central Bank’s; to 40 per cent of GDP. We would need securities worth another 30 per cent of GDP.
What would 30 percentage points look like? In net terms the entire stock of Australian government bonds in the market amount to 30 percentage points of GDP.
We would need to go out and buy every single Australian government security, and there are many reasons why we might not want to.
So again, in the spirit of a thought experiment, what else could we go out and buy?
There are asset-backed securities, primarily residential mortgage backed securities.
I used to think that this was impossible. It may still be. The idea that a small, open economy with a chronic current account deficit and giant foreign debt can print money without triggering capital flight used to be absurd.
But imagine a circumstance in which the US has re-entered recession and the Fed, BOJ, BOE, PBOC, ECB and various smaller European nations are not only printing money for securities but also for things like universal basic income and infrastructure plus other QE’s for the people.
In such a context, with Australia’s commodity markets flattened, the Budget shot to pieces by sovereign downgrades, domestic demand already crushed by falling house prices, the AUD already deflated, but interest rates held stubbornly high by foreign markets punishing our banks, then why couldn’t the RBA do it?
That might be the very moment to go long Australian equities for the first time in a decade.
