No QE says monetary curmudgeon Stephen Grenville:
QE1 was a powerful instrument in rescuing key financial markets which had frozen, but this experience has no relevance for Australia in the foreseeable future.
When the current monetary system was put in place in Australia in the 1980s, ‘free markets’ were the lodestone of policy. The RBA would set the short-term interest rate but would not try to influence the rest of the yield curve (in the way the government had set the bond rate in the immediate post-war years). This was not just about free-market doctrine: as well, there was a belief that the market-determined long end of the yield curve gave useful feedback about the underlying state of the economy, inflation expectations and the proper price of capital.
Then there is the delicate relationship between monetary and fiscal policy. Let’s return to the American example. During the QE period, the government was running big deficits, funded by issuing bonds. At the same time, the Fed was buying bonds, keeping the bond yield down. This wasn’t the same as ‘money-funding-of-deficits’, which is anathema to all budget-deficit-fearing economists, who believe it opens the floodgates of political profligacy. Importantly, the decisions were taken by two different institutions: the Fed on the one hand and the administration/Congress, on the other. But the outcome was the same, and the effect was to neutralise the ‘bond vigilantes’ who during President Clinton’s presidency disciplined his budget actions by pushing up bond yields.
On the 10th anniversary of the start of QE, Ben Bernanke said that he saw it as an emergency measure, to be used when conventional policies were unavailable. This emergency role for QE seems inapplicable to Australia. If more stimulus is needed, other policies — such as fiscal policy — should do more.
Too true. But it isn’t. Indeed fiscal is deliberately being held tight to force the RBA to print and inflate asset markets. That was ScoMo’s promise to quiet Australians and he is going to deliver no matter the cost. Indeed, The Australian is reporting today how far Recessionberg went to hose off the RBA’s fiscal push:
Josh Frydenberg’s ministerial office urged Treasury officials to emphasise the “scale and breadth” of state and federal infrastructure programs in a presentation to Reserve Bank governor Philip Lowe after the central bank boss made a rare public appeal for more infrastructure programs to help stimulate the economy.
The presentation, delivered to the head of the central bank by the Treasurer and key officials from his department, took place shortly before a joint conference between Mr Frydenberg and Dr Lowe in Melbourne in July.
Details of the presentation and deliberations over what should be included in the slides have been obtained by The Australian as part of a cache of documents released under Freedom of Information laws that reveal how the Treasurer and his office sought to ease concerns at the RBA that the government was not spending enough on infrastructure.
According to the presentation, Mr Frydenberg told Dr Lowe why it was “difficult to speed up spending for major projects”, that the government was already investing “substantial” funds in defence infrastructure and that spending taxpayer funds on maintaining existing infrastructure was potentially a more realistic way to stimulate the economy.
Moreover, if everyone else is doing QE you don’t have a whole of choice in the matter. Any move to not do it will just result in monetary tightening via a skyrocketing currency.
It would certainly be better for the Lunatic RBA to shift straight to “helicopter money” over QE but it is a terrible intellectual laggard so we can forget about it.
QE is coming. Recessionberg is insisting on it.