More on Aussie QE

From Westpac this time:

• As mentioned in our front page essay, last week’s RBA Board Minutes did nothing to silence the increasing market focus on the potential for the RBA to venture into more unconditional forms of monetary policy, such as quantitative easing. That is despite RBA Governor Lowe stating later in the week that the RBA is “quite unlikely” to undertake this approach. • So should the debate about QE cease? We don’t think so, as we interpret those comments in the context of a central banker who does not expect to cut the cash target beyond a level where it loses its effectiveness. Indeed, Dr Lowe suggested that its economic goals could be achieved without a “… a massive change in interest rates”. Even so, the market has a more pessimistic view of the RBA’s ability to achieve its goals and hence the QE debate will be ongoing.

• So could QE work in Australia and what would it look like? On the following page we have listed a far from comprehensive list of approaches, which can be divided into 2 main types – those that target shoring up the financial system, such as those used in the GFC, including providing liquidity and cheaper funding to banks, and those more relevant to underwriting growth and the general welfare of the nation.

• As for the former approach, RBA Deputy Governor Guy Debelle has had this to say. “QE is a policy option in Australia, should it be required. There are less government bonds here, which may make QE more effective. But most of the traction in borrowing rates in Australia is at the short end of the curve rather than the longer end of the curve, which might reduce the effectiveness of QE. The RBA’s balance sheet can also expand to help reduce upward pressure on funding, if necessary, as occurred in 2008.” There is no suggestion that this QE is necessary in Australia.

• In our view, it is the second goal that would be more relevant in the current context. The RBA has been increasingly vocal in suggesting that fiscal policy needs to play a bigger role. We would concur with that. With that in mind, and with the RBA’s focus on excess labour market capacity in mind, we think that any RBA sponsored QE would more likely be via support for infrastructure projects which would have multigenerational benefits. We think it should be open-ended, countercyclical and linked to macroeconomic variables as to when the “funds” are invoked or switched off. That would remove the sometimes counteractive signalling that occurred in the Feds multiple QE phases.

Phil Lowe is the last person to ask about Aussie QE. He wouldn’t know if a deflationary bull was up him. Aussie QE is inevitable. Alas it will be too conservative, too late, too small and so we’ll plod on into deflation as far as the eye can see.

Comments

  1. BrentonMEMBER

    The bottom is my preferred by far. Forces the monetary stimulus to be in conjunction with a commiserate amount of fiscal stimulus. Ensures transmission of QE into the real economy. Ensures infrastructure investment continues to meet population demands.

    The drawback is that it is more likely to drive inflation; but that would be a testament to its efficacy in stimulating the real economy, as opposed to simply inflating financial assets (failure) and incentivising share buybacks (failure).

    • DominicMEMBER

      Sounds like death by a thousand cuts to me.

      Turbo-charged MMT is my preferred option. The existing monetary system is basically doomed — let’s get the reset happening ASAP rather than drag it out for another 5 or 10yrs.

      Just topped the $13 trillion mark of negatively yielding bonds globally. It’s basically game over. When rates are negative it’s saying money has no value. Watch gold cruise easily by the previous $1,900 high and not look back.

      • DominicMEMBER

        @flawse
        Pretty much. MMT and/or UBI is what will deliver inflation in spades to the consumer sector. QE just inflates financial assets (with some slow consumer sector trickle down) and increases wealth inequality.

        The truth is though, it may not even take MMT to get us there — there are already genuine signs that underlying inflation is on the increase, just starting to bubble up in places it’s not been seen for decades. The reverse globalisation shift is a surefire way to assist in that regard. I do most of the (supermarket) shopping and am extremely sensitive to price changes — there is upward pressure everywhere, persistent ‘on sale’ items notwithstanding.

        Once inflation emerges into the light it will be unstoppable — the consumer will soon get the message and it’s off to the races. The RBA will be rooted — how much can they afford to raise rates to stop inflation in its tracks? The answer is they can’t afford to raise at all lest they blow the housing farce out of the water.

      • Dominic – my opinion is that they will ‘look through’ inflation for a while. As you say they have no choice and the idea that it is just temporary will let them off the hook. Of course it will go totally out of control. Those who have power – Lawyers, Bankers, large retail, powerful unions et al will go for their compensation ‘because its only fair” The rest of us will get it in the neck – but who gives a Rat’s!
        I’m old enough to have seen it all before.

    • Letting it crash is my preferred option. Financial shocks, if they are short and sharp, will clear out the bad companies and let property prices return to sane levels.
      MMT and QE are just kicking the can down the road not fixing the rot in the Australian economy.

      • DominicMEMBER

        Love the sentiment but not going to happen. Voluntary abandonment of the debt-based monetary system and it’s associated asset bubble? I think not. The establishment will continue to ‘do something’ until everything they have tried has failed and the economy and monetary system is reduced to a pile of rubble.

    • Nah.
      None of the above.

      “Take over funding of the dole – and up the total amount”

      * Counter cyclical
      * 100% spent
      * Consistent flow into the economy every 2 weeks
      * Can still work in conjunction with interest rate policy

  2. “He wouldn’t know if a deflationary bull was up him.”
    fair call,though unsurprising, as the entire rba,over the last3 decades, would not know if they were wad punched, reamed, drilled, line bored or gorilla fvckdd

  3. “Phil Lowe is the last person to ask about Aussie QE. He wouldn’t know if a deflationary bull was up him. Aussie QE is inevitable. Alas it will be too conservative, too late, too small and so we’ll plod on into deflation as far as the eye can see.”
    Yeah!! Let’s go! Print up a Trillion! Do it quick?
    Everyone seems to think we can print REAL money.
    There ARE consequences. Can we please have a list of resource assets, key industry and infrastructure we are going to sell to foreigners to cover the fact that almost everything we print is going to end up in the external account as higher CAD.
    Infrastructure projects???? What projects? Trains and roads for Sydney and Melbourne who produce nothing? Effectively, in this economy as it is now structured, that is just plain consumption expenditure that results in more debt and, specifically, foreign debt.
    It’s always easy answers – all we need to do is print more money and pass on the cost to the next generation!! Consume more!!!
    It’s proven such a great policy over the last two generations we ought just continue it into infinity.

    • Jumping jack flash

      “Yeah!! Let’s go! Print up a Trillion! Do it quick?”

      A trillion would not be enough. There’s a lot of money being sucked out of the economy every day/week/month through the nonproductive debt that continues to grow.

      Besides, there is no free money, as you say. Banks aren’t going to give away free money. Governments also can’t do it. They are all bonded to the rules of money, unless we want to go full Zimbabwe.

  4. Jumping jack flash

    Personally I don’t think banks and bankers should be consulted at all with regards to what needs to be done. They will always choose the option that benefits them. Now it looks like we’re getting QE to help the banks out. We were meant to have the best banks in the world. Solid banks. Our houses were worth whatever they needed to be worth to support the nonproductive debt attached to them – but look, we’re drinking from the QE toilet bowl like all the rest, now.

    Their aim is a system that can produce infinite debt. It looked like it would work. It was so close to working (depending on how you look at it – we’re only around 7 or 8 trillion debt dollars and we already need QE! That’s nowhere near infinity!) but unfortunately infinite debt is actually impossible due to the interest that is required to be paid on the nonproductive debt.

    So they lower the interest, lower and lower. So low that the banks need QE to keep functioning, but it will never be low enough to support infinite debt. To do that interest rates must be zero, and that can never happen, or the banks disappear.

    1×10^-23% of infinity is infinity, not 0, and therefore the interest on the nonproductive debt must eventually destroy the system no matter how low the rates go.