Q.E. or Advances to State, Dr Norman?

Last Sunday, Russell Norman, co-leader of the Green party, really opened up the economic policy debate In New Zealand. He talked about printing money, or Quantitative Easing (Q.E.), and how the central bank could help fund the reconstruction of the city of Christchurch, after the earthquake damage. This was a taboo subject here. There is a history of printing money to fund public assets, in the form of public housing projects. I have written about this extensively, but it has been ignored. It had been a core part of the Labour Party’s history, but they had long forgotten this, and still stick to the prevailing rigid financial orthodoxy.

So Russell Norman really broke some new ground, but also revisited a past policy. There has to be some qualifications to what he said, in case of conceptual confusion. Q.E. as practiced in the USA by the Federal Reserve, and by the Bank of England, involves throwing money at the banking system, on the idea that a lack of liquidity is preventing credit being extended to their economies. But there is no precedent for those central banks to actually print money for public finance, and to underwrite public spending on assets, that is still heresy. However, the process is the same, in a roundabout way. The central bank purchases public debt in the market, or any other securities deemed relevant, and in the process new money goes into the banking system. If the central bank did that to fund the public accounts the money would still reach the banking system eventually, but something useful would be achieved on the way if building construction is directly employed.

Of course, Dr Norman was ridiculed for his trouble. There were all sorts of silly comparisons to hyperinflation in Weimar Germany, and more recent events in Zimbabwe. The Prime Minister, the former currency speculator, John Key, made the odious counter, that it would be poor pensioners and beneficiaries that would lose out once inflation was back in the system. Why a little bit of liquidity hurts when it goes through the public accounts, but not when going straight into banks’ balances sheets, is never adequately explained. This shows how pervasive right wing ideology is, and also how weak it is in this situation. We all know that the central bank will do Q.E. if the situation requires it, from their definition of economic crisis, unless we are like southern Europe where it is austerity all the way.

 Dr Norman had previously wanted the earthquake reconstruction to be based on a targetted tax, but he has now changed, or so it seems. There is now a wider political agenda for the Reserve Bank legislation to be changed. All the opposition parties know that the Reserve Bank will resist any direction from the finance minister, whether it be to intervene in the exchange market, or to purchase a modest $2 billion of special earthquake bonds. For Dr Norman’s proposal to really work the Reserve Bank would have to accept long-dated stock with a nominal coupon rate, a type of security which is not marketable. This is how debt redemption used to be financed in the 1940s, and would be the only way to re-create an overseas based disaster fund, the other aspect of Norman’s proposal for the central bank to print money.

All the opposition parties accept that inflation targetting is too narrow for the central bank to pursue in the current situation. Though some central bankers have subtly re-defined price stability to include possible deflation, hence the need for Q.E., the Reserve Bank in New Zealand have not. But the current legislation is based on a ruse in any case. It was introduced at a time when the economy was opened up, all import and exchange controls were removed, and the exchange rate was floated. With the exchange rate moving all over the place, prices must surely go with it. So how does the central bank control all prices, as measured by the Consumer Price Index? In practice this must be through having interest rates relatively high compared to other countries, in any given situation, including right now. It really doesn’t matter what the CPI does, as an abstracted index of domestic inflation, when the interest rate on public debt is the only thing that matters to the currency markets.

 Besides the irrelevance of the theory behind inflation targetting, there is a complete lack of accountability in the legislation. The inflation target is to be below 3%. Of course, inflation has gone over 3%, but nothing actually happens in this situation. The central bank governor has never offered his resignation, and can always make some excuse about extenuating circumstances. So the ‘end justifies the means’ approach does not function. And the policy remains one of relatively high interest rates on bonds; this creates a cycle of capital imports and a current account deficit. One day the system will come under pressure, and the Reserve Bank will do Q.E., but they will try to be the ‘last of the mohicans’ until then. The idea that little old New Zealand is chief-like in monetary policy, and too pure to sully itself with printing money, is a farce. It is also a distortion of history, just as much as comparisons to hyperinflation in other countries when in great social stress.

But good on Russell Norman for sticking his neck out, for the international finance supplicants in this country to attack.

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