On Tuesday 19th May John Campbell, host of TVOne Breakfast, interviewed Yuong Hu, Chief Economist of the Reserve Bank of New Zealand and asked him about printing money. If the Reserve Bank is going to buy billions of dollars in Government bonds where does the money come from?
Q. Is Quantitative Easing the same as printing money?
A. Well the process is very similar. But rather than being bedazzled by the term Quantitative Easing (and us economists love throwing around these fancy terms), it might help if I can set the scene. I think the name of the game is still the same. We want to lower interest rates. The economy is taking a big hit right now. It needs all the support it can get. And the central bank can provide that support by pushing interest rates low and keeping them low. So we have got to find different ways of getting interest rates down. Quantitative Easing is a fancy name. You probably would have heard of the OCR. That is a more traditional way of doing monetary policy but we are now using Quantitative Easing. A good analogy would be the OCR is like 10 man rugby – very traditional but Quantitative Easing is (inaudible) backline.
Q. Are you printing money? Are you somewhere out the back with the printer?
A. Metaphorically we are. That’s one of our special powers. Central banks can print money or create money. These days it’s done electronically. We’re in a digital world. It’s not analogue. We are not physically up there turning the crank and the handles and money coming out. If I can I can use a simple analogy. There are retail interest rates like mortgage rates and these set at a margin above the wholesale interest rates. We pay the retail price. We are trying to do with Quantitative Easing is to lower the wholesale interest rates in the economy, in this case Government Bond rates. Then banks can pass on the lower rates and this will lead to lower mortgage rates and lower business rates.
Q. Yes but can I come back to my obsession? But you are creating money. Who gives you the right to do that? Who says you can?
A. Well the Government does. I mean it’s written. It’s our superpower if you like. Legislation says that. All central banks have that power, just like Government has the power to levy taxes and change taxes. Central banks have the power to create money.
Q. When the Government eventually repays you what happens to the money?
A. It gets unprinted. When that money gets repaid, it sits on the Reserve Bank’s balance sheet and we just metaphysically destroy it by undoing it with a few keystrokes.
Q. It just ceases to exist. Boy. You can see how people get confused by this, can’t you?
A. I think people get confused by the Quantitative Easing. To the uninitiated it feels astounding, but central banks actually do this on a daily basis. We have been in the business of creating money for years. There is nothing untoward about it. We have done this for many decades. It’s just that it has grabbed all the headlines. It’s like finding out you can lift the line-out jumper.
End of interview
My take on this is that he didn’t spell out the mechanism by which interest rates are lowered. I understand from a letter that Grant Robertson wrote to Amanda Vickers that buying bonds on the secondary market, that is from banks in NZ and overseas, pension funds and other institutions is the method they prefer because it lowers interest rates, or is supposed to.
However my belief is they should buy bonds directly from Treasury because it then Treasury has a debt to another branch of Government and the debt can just lie on the books. There is no need for repayment. This is the big difference between what they are doing now and what would be best for taxpayers. I read that Grant Robertson and those in RBNZ have not ruled out this possibility. It is just that they had better get on with it because one bank economist estimated the other day that RBNZ is buying at a rate of $1.1 billion a week.