Quantitative Easing – Pump It or Dump It?

Cy Sinderson

‘Quantitative Easing’; it’s the phrase on every banker’s lips and that gets me worried because we don’t often see eye-to-eye on anything – well, okay, so let’s make that never.

But finding out about this apparently momentous financial event that can cure blindness and make the crippled walk again is not easy. Looking online for a simple explanation proved so outrageously difficult I began to suspect the invisible hand of a mysterious secret banking society who, in order to protect the true essence of their craft, have laid a series of light-sensitive tripwires on economic websites that explode up fresh monetary jargon to obfuscate any understanding and hopefully off-put any inquisitive non-financial type. Like a kid’s party game of Pass the Parcel, you unwrap one layer of confusion only to reveal another below. And another, and another…

But, for my sins, I persisted until I finally reached the essence and – holding it in my trembling hand – I looked into its dark soul and gasped as I saw the truth with my own eyes. The results of which I present to you now – but first, a brief history lesson to set our scene:

EVERYBODY GET GROWING!

Despite what it might feel like, the world hasn’t always been obsessed with economic growth. In Medieval times the vast majority of us would be serfs. Our lot was pretty grim; there was nothing more to look forward to than an entire life of backbreaking slog in the fields working for The Man. Nothing much changed; the tuppence a week we earned when we started out hoeing whatever strip of dirt the local lord rented to us as strapping young men – was the same tuppence a week we earned hoeing fields as wisened old husks of men. And if you didn’t like it and dared to raise your pitchfork in protest, then the King sent in his soldiers to brutally suppress your Pinko Commie Peasant’s Revolt.

But the benefits of such an economy were; no inflation, no economic downturn, no banking crisis, no negative interest rates and no Quantitative Easing. All those First World problems had yet to furrow our brows because we were living in a steady state economy. No ups, no downs, just a flat line.

Today, for those of us fortunate enough not to live in Xi’s China (or King Trump’s America if he wins another term), this feudal scenario belongs only in the history books. Luckily for us, the Industrial Revolution bounced along and opened the world’s eyes to the possibilities of becoming an entrepreneur. From there we learned that by using our brains as well as – or instead of – our muscles, we could become as wealthy as those lazy lords who were gifted everything due to nothing more than a fortunate accident of birth.

Yet if it seems to you that the world seems obsessed with economic ‘growth’, you’re right. It is. It has to be because the whole world’s economic model is based on it. Growth means an increase in the production and consumption of ever more goods and services and the growing of a population to make and consume all those extra goods and services. It is usually measured by an increase in gross domestic product (GDP) and is a treadmill of More! More! More! But it is also a reflection of us as an ecosphere of capitalist entrepreneurs and without it we wouldn’t have more economy to corner for ourselves as a just reward for our hard/clever labour.

This concept of perpetual growth affects absolutely everything in our society and without it banks wouldn’t lend, investors wouldn’t invest, jobs would dry up, products would disappear from the shelves, medicines from the cabinets and the future would look like the past. It is the reason why Communism failed because if we don’t have something to strive for, then we don’t get out of bed.

And even if we choose to huffily reject today’s filthy Capitalist society and go troppo; that carbon-neutral bicycle we ride was made in China under an economic growth-based manufacturing system and those mung bean seeds we are buying were grown by a profit-making South East Asian organic health foods co-op and delivered by a Kiwi transporting company hoping to post juicy dividends to its investors. Economic growth is endemic, it’s how the world works. And it’s not so bad, it gets us the stuff we want – no matter what that might be.

KEEPING IT UP

But keeping economic growth in the positive isn’t easy. Try keeping a kid’s party balloon up in the air with hand taps for a while to see what I mean.

The same thing happens all the time to the poor old Reserve Bank who are charged with keeping our economy marching forward within stringent targets. And every time somebody opens the stock market’s front door, the tiniest breath of breeze will blow the economic balloon off course, forcing the Reserve Bank to hurry after it and get low to bat it back up again.

Their usual tool of choice for this task is the Official Cash Rate; as cutting this allows the banks to lower their interest rates which in turn encourages people to reboot growth by borrowing for houses, cars or other big ticket items again. Whenever the associated borrowing degenerates into a feeding frenzy they start pushing the OCR back up again to cool things off.

It’s a good system that seems to work pretty well – most of the time. But there’s a problem, what happens once the OCR gets down to – or close to – 0%? Where do you go next?

This year we found out, as the scenario described above came to fruition and the Reserve Bank decided to give this new-fangled gadget called Quantitative Easing a lash. It is only new to us as the Americans have had a couple of licks at it since the GFC of 2008, although you could argue they had actually tried it during the Great Depression of the 1930s too.

HOW THE THEORY WORKS

Basically, Quantitative Easing is a little game of buy and sell between banks where the Reserve Bank creates new cash to buy up existing governmental bonds from commercial banks. The idea here is to both free up cash for banks for new lending and to make boring (but safe) old bonds less attractive to investors as their yield reduces. In theory, they’ll be then forced to start sniffing around for more commercial – and thus riskier – investment options.

‘Hey!’ I hear you cry, ‘But doesn’t printing a whole lot of money like that create a massive amount of inflation like we saw in ‘30s Germany and more recently in wacky old Zimbabwe?’

The answer is; ‘Not necessarily.’ In a recession, the banks slow lending so less money is going out into the economy, yet the borrowers are still paying off their loans – so as a result of this, the volume of money in the economy is shrinking. By artificially propping up that shrunken area of economy with freshly minted cash all the Reserve Bank would argue they’re doing is filling up the balloon to keep the economy ‘whole’. But how they get the money out again once the economy turns and starts generating on its own is way beyond my pay grade!

The theory here is that by forcing interest rates down and freeing up the banks to lend again the public will come sprinting into the banks to borrow so they can buy a whole bunch of bright shiny new expensive toys and get our economy to grow again…

CALLING ALL RATIONAL PEOPLE

I’ve never met a truly Rational Person. I’ve met people who wear a raincoat when it rains; who only buy No Frills produce; and who only refinance their mortgages when the interest rates drop low enough to make it financially tenable to break their existing contract. Marveling at them I think; ‘Ah, there you go, such people DO exist!’ Then they let me down by going and doing something that defies logic – like dutifully supporting the Warriors through thick and thin or having an inexplicable fear of clowns or refusing to like pistachio ice cream because they threw it up once when they were six years old. Which may not be a problem until you, in your entrepreneurial spirit, set up a stall at Mt Smart Stadium called ‘Krunchy the Klown’s Nutty Ice Cream’.

‘Great!’ I hear you say, ‘Vive la difference!’ It’s good that we’re not all robots, that we are all not so predictable that we know what any one person will do in any given situation. It gives us hope that life can be interesting, and sometimes even fun.

The problem is; no one has told economists this. All economic theory seems to be solely based on the Human Race being entirely populated by such mythical creatures as Rational People. A case in point; Quantitative Easing is a rational theory that relies on rational actors – actually, let’s just call them ‘automatons’ – who will do exactly what we expect them to do because LOGIC demands it. Sure, the banks will more than likely act as automatons here because they can see there are benefits in this system for them. But what of the banks’ customers at the end of the chain? Will they snap up these bargain interest rates? Surely it makes SENSE to buy up large during a Quantitative Easing program…

HOW THE REALITY WORKS

The problem is; savings on interest rates aren’t much solace to the general public during a recession. The logic many of the banks’ customers is more likely along these lines; ‘Um, I don’t have any money in my account’ and/or ‘I don’t have a job so I’m NOT going to spend any money on ANYTHING. I’m going to try and spin out whatever money I still have as long as possible. Taking on further debt is the LAST thing I want to do.’

And what of the banks themselves? Lest we forget, we’re still in a recession so who are the inherently conservative banks likely to lend to? Umm, let’s see… Bankers are not elected politicians so they’re not obliged to please anybody but their investors and of course investors really like getting a return on their money. And during a recession that return is more likely to come from a low-risk customer. And what do they look like?

Well, they’ll already have lots of money in the bank or they’ll have a lot of property or they’ll have stakes in successful businesses. I.e. they’ll have a lot of valuable stuff they can use as collateral, which makes them low-risk to lend to for a bank. In other words; they are wealthy.

So what will these wealthy people spend their Quantitative Easing-inspired money on? Well, the banks in their innate conservatism will want them to spend it on low risk investments like; property or blue chip stocks. Things that don’t necessarily have to mature into a profit quickly because the wealthy people already have the means to survive. They have the wherewithal to sit on it long enough to outwait any recession.

And so how is this new Quantitative Easing-inspired investment in property and/or stocks going to stimulate the economy? How is it going to create new jobs, increase manufacturing and consumption? Um, well, the borrower may have to temporarily hire a lawyer, real estate agent or stockbroker… and that’s about it.

Such investments don’t create any new jobs, stimulate production, sales or growth in any way. So Quantitative Easing will achieve absolutely nothing more than allow the extremely rich a free pass to get even richer. As usual.

IT’S TRICKLING DOWN AGAIN

To me, Quantitative Easing just looks like a fresh coat of lipstick on the old Trickle Down theory which absolutely no one likes – except the handful of Tricklers and their PR firms. The only difference here is that the government is giving all the money to the people they perceive as the adults in the room, in this case the banks, and letting them decide who’s been naughty and who’s been nice. To the rest of us go the scraps – which sucks.

Sure, Quantitative Easing COULD still help entrepreneurs like you and me – and may well do, here’s hoping – but make sure you have either a low-risk business idea or a heap of bank-friendly collateral on hand first. Which pretty much rules most of us out otherwise we’d already be standing in the Trickler line with our hands out.

But is there anything out there better than Quantitative Easing?

EAT OUT TO HELP OUT

The jury is still out on the UK’s Eat Out to Help Out scheme as it hasn’t been going for long yet but signs so far are promising. In a nutshell, the scheme encourages customers to stop brooding at home about the economy and go out to a restaurant for a few laughs and a bang-up feed. And if they go to a participating eatery on a Monday, Tuesday or Wednesday they can get 50% off their meal and drinks up to a maximum of £10 per person. And as many times as they like. The restaurant advertises their menu items at full price but only charges the customer half and claims the rest back from the government.

So with this scheme, not only do the restaurant chefs, waiting staff and accounts people get to keep their jobs, but the farmers, bakers, condiment manufacturers, delivery people, cleaners and even the damn parking wardens patrolling the streets outside get to keep theirs too! And therefore; they all might think twice about dismissing the idea of buying plastic goods, taking out a loan or investing in shares to boot!

Of course, like everything anyone ever attempts these days, the scheme has its share of bitter armchair snipers who have keenly noted the inclusion of some fast food outlets in the scheme – and don’t you know they are bad for the health and blah blah blah… But as a global economic stimulus this scheme kicks Quantitative Easing’s butt all the way down the street as far as I’m concerned.

UNIVERSAL BASIC INCOME

US Democratic primary candidate Andrew Yang rose to prominence over the last year with some unexpectedly fresh social economic thinking. So obviously Mr Yang is not a proper politician as he doesn’t yet realise that politics is no place for ideas these days!

Now, whilst Mr Yang’s political bid ultimately failed, his Universal Basic Income concept caught enough attention that even the Trump Circus felt obliged to at least pay it lip service by inviting him in for discussions. And though this is an American idea, its application could possibly be applied here if the government thought it had merit, so let’s look at it a little:

In a nutshell; Mr Yang suggested paying out $1000 a month cash to every adult citizen. Which sounds lovely! Who wouldn’t put their hand up for a hand out? But once you start delving into where the money will come from to pay for such candy, the gloss comes off the idea a little. Although, to Mr Yang’s credit, unlike so many proper politicians at least he has actually done his sums and put his workings up to be marked. His UBI would be basically a straight replacement for all benefits using the money earmarked for them plus a new 10% VAT, i.e.; GST which the US doesn’t have currently. In shades of Roger Douglas, this Democrat is suggesting making a smaller government by ‘consolidating’ all benefits with his UBI dividend. ‘Consolidating’ is one of those wonderful euphemisms business leaders use like how ‘downsizing’ is used for ‘sacking lots of people’. What Mr Yang is really saying is he wants to ‘dispose’ of the welfare state and replace it with a new uniform handout which is open to any sort of ‘qualificational adjustment’ later. Which could be anything from work-for-dole to means testing.

Whilst trying to dispose of the dependency trap and encourage all beneficiaries to develop an entrepreneurial spirit like Mr Yang is an excellent suggestion, I fear this approach might be a bit too blunt and abrupt for most. Plus, consolidating such massive entities as Kainga Ora/Housing New Zealand and Te Hiranga Tangata/Work and Income into one super department when they are already understaffed/underqualified would most likely lead to a massive bloating of whatever the new department looks like back to previous levels – and then some. And the associated confusion and internecine rivalry doesn’t even bear thinking about!

Not that everyone wouldn’t like it – a student fresh out of high school, still living at home and receiving $175.48 after tax on Jobseeker Support might welcome a slight increase in their benefit to around $250 a week before tax – but pretty much everyone else; solo mums, pensioners, even seasonal workers, will be a loser under the scheme.

So, it’s not going to fly then. Absolutely not. Why is he suggesting such a ridiculous idea at all?

Well, on paper it’s not so ridiculous. The cost of his scheme here would be around $44 billion per year and the government currently spends around $37 billion per year on benefits, including administration, so there’s not such a huge gap to fill. But why do it at all? Well, the reason Mr Yang gives is because he sees a future where the incessant progress of technology and automation preclude the need for a human workforce – so there will be mass and ever-increasing unemployment rates. So we should prepare for it with a minimum ‘wage’ for everybody in such a society. This is where he shows his true Democratic side in that he is trying to LIFT everybody up to the same minimum level instead of just discarding the unlucky/unprepared ones down onto the same level of the scrapheap.

But I suspect what really aggravates Mr Yang is that benefits are so passive; just money doled out to people who sit around and do nothing. He’s probably upset at the loss of potential genius, skill and imagination of vast swathes of population, young and old, unaware of their potential due to innate inter-generational dependency. And he’d be right, it IS a criminal waste and Quantitative Easing sure isn’t going to address that either.

USING DEBT FOR GOOD

One subject that seems to inflame passions more than any other – except perhaps who should be All Black coach – is national debt. To some; even 5 cents of debt is conclusive proof of government mismanagement and mollycoddling of the arts/ethnic minorities/motorway building industry/beneficiaries (circle whichever is appropriate) to a virtually treasonous level. Yet those very same people quite possibly have a mortgage of their own and/or a credit card and are quite happy to have what they want today and pay for it tomorrow. After all, what use is saving up all your life gathering the entire sum to buy a house if you die of old age before you can move in?

So why should governments be any different? We elect them in to get stuff done then want to tie their hands financially? Crazy stuff, imagine if your boss told you to go build someone a house – but don’t spend any money at all doing it. I’ve got a good idea what you might retort with!

Besides, comparatively New Zealand has been pretty frugal really as our national debt was 29.84% of GDP in 2018, whereas the USA had one of 104.26%, the UK 85.40%, Germany 59.80%, Japan a massive 234.99% and even China was at 50.64%. Yet on the other hand; Botswana was very financially responsible with a national debt of 12.12% of GDP, Afghanistan had 6.89% and Timor Leste 4.28%. But where do you think you are more likely to find a job?

Obviously, you don’t want your government to go nuts in the sweet shop but the concept of economic growth allows them – and us – to buy today and pay tomorrow. And the constantly growing economy makes the staggering debts of today look like a simple IOU note in the future. For example; a teacher at my school bought two neighbourhood houses in the ‘70s for around $40K each, she’s paid interest ever since but they’re probably worth $1.5M each now. Yet she still owes $80K of principal to the bank. Big deal.

The important thing to consider is WHAT your government is spending it on. If the debt is being expanded just by ‘dead’ payments propping up society, then you have a problem because you are not growing anything. Such payments are necessary but you also need to expand your economy as well to outgrow your debt. More! More! More!

Yet Quantitative Easing is not the answer to our economic problems because it gives no guarantee that it will help our working people let alone our beneficiaries, it just widens the wealth gap. But maybe investment in infrastructure and technology could be ‘an’ answer if not ‘the’ answer. Sure, not everyone wants to have a job where they have to wear a hard hat to work and the construction industry doesn’t currently offer an awful lot of opportunity for women – although that is slowly changing. Painstakingly slowly. But the benefits of such big ticket investments go out to a lot more people and last a heck of a lot longer than banks playing Monopoly.

Once upon a time you could utter the words; ‘Think Big’ and have at least half of the population heartily scoffing at you as a poor deluded fool who belongs back in the day with old ‘Piggy’ Muldoon and Car-less days. But last year all that changed once Labour busted out their own Think Big $12 billion infrastructure plan, although they called it a much more committee-friendly ‘New Zealand Upgrade’ to go with their ‘Team of 5 Million’ and ‘Let’s Keep Going’ innocuity. Then suddenly Think Big was; ‘exactly what this country needs’ and ‘the only sensible solution’ to our economic woes.

Don’t get me wrong; I’m not against Labour’s plan at all. Au contraire, mon ami! I think it’s definitely a step in the right direction. In fact, I’d ask; ‘Is $12 billion enough’? One thing you will never run out of is infrastructure projects to spend money on – but imagine the savings in worker time and money if we had suburban train systems in our cities commensurate with those of Tokyo, London or Paris? Or a proper mass transit system that ran the length and breadth of the country? Or a water supply system that didn’t waste treated water on flushing toilets and watering gardens? Or even better schools and hospitals? And even more of them!

Prime Minister Muldoon was looking at the world through 1970s eyes and he gambled on energy projects and he was wrong about some of them – it’s easy to criticise now with our 20/20 hindsight. But he was RIGHT about others and we are still reaping the benefits of those. Investing in infrastructure and technology is no different to any other type of investment, you’ll get some right and some wrong – it’s the game.

We’re in the 21st century now so the investment opportunities are different and new technology changes the playing field every day. So surely we should be giving some more thought to today’s Think Big type projects in the carbon-free energy fields of solar, wind or even tidal projects? And they don’t all have to be big ticket items, if we have a government willing to punt on investment in new technology we’re guaranteed to get some duds but we’ll also get some PowerbyProxis too instead of Apple reaping the benefits.

LET’S SEIZE THIS OPPORTUNITY

We need to think of the recession caused by Covid-19 as an opportunity to take pause and rethink our national goals and social strategies. If we are willing to cough up $37 billion a year to pay people to do nothing, then what’s a couple of billion dollars more to invest in future technologies or better infrastructure? If the Reserve Bank can ‘print’ billions of dollars to encourage banks to buy bonds to force interest rates down and line wealthy people’s pockets through some Quantitative Easing scam – why not use that money instead to create much-needed infrastructure that will give us jobs today and greater efficiencies for our children and the generations to come?

The time to ‘think big’ is now, we need to get beyond petty squabbles over whether this department or that enterprise is making mistakes or losing money and look at the big picture. Andrew Yang is right about one thing; the ever-advancing world of technology will change many of the jobs we have today. So that means it is more than likely that the ‘working lifestyle’ we have now isn’t going to be the same in the future. Maybe it will be unrecognisable from what we have now or maybe it will be gone completely. One thing is for sure; whether or not we have any say over how that future looks for us will be controlled by the decisions we make now.