Economic Recovery

Printed money being parked, not invested or spent

Our Reserve Bank has printed $32.2 billion to buy bonds since Covid-19 struck, but 90 percent of that cash is still parked in bank accounts. Bernard Hickey looks at why it isn't being invested or spent to revive the economy.

It has been a problem ever since central banks in America, Japan and Europe began Quantitative Easing (QE) or money printing over a decade ago during the Global Financial Crisis: the new money didn't circulate and generate much new investment or spending or economic growth. It was just parked in bank accounts or piles of actual cash, or other unproductive stores of value such as gold, art, property and yachts.

That freshly printed money was handed over by independent central banks to bond owners in exchange for their Government and other bonds. The aim was to lower longer term interest rates (because they'd already cut short term rates to zero) and get that money circulating in the real economy to generate spending, jobs and, ultimately, some extra inflation. The idea was that banks would lend to businesses to invest with these new lower interest rates, and investors would use the cash from their bond sales to invest in new companies or expanding companies to generate activity, jobs, spending and inflation.

It seemed like a good idea at the time, but it didn't take into account that already rich and mostly older investors didn't have much of an appetite for either investing or spending. Fear and a lack of need to consume or take risks meant they parked that money where it did no good for the wider public. They stashed it away, rather than risk investing it.

So that fresh cash was either just pumped into existing property, shares and other assets in a way that simply made already rich people richer by inflating asset prices, and did not filter through to the wider economy and workers and the poor at large. Governments in America, Europe and Britain that were obsessed with keeping public debt low and taxes as low as possible, did not invest much in new infrastructure or public services in the decade after the GFC. In circulatory terms, the extra money supply simply slowed down and did not generate the inflation that many feared and central bankers hoped for.

Either banks were unwilling to lend the money out to investors and spenders because they were too nervous or had been told to preserve more capital, ironically sometimes by the same central banks wanting them to lend more. Rich and older investors and pension funds were also nervous, but were also aware that they weren't allowed to take big risks given many were about to retire and would shortly need cash to supplement their retirement incomes.

Alternatives being considered overseas

This has sparked debates overseas about whether money printing actually works to stimulate the economy, or is simply increasing inequality and creating risks of bubbles bursting at a later date, or a broader revolt by the poor, the young and renters who have missed out on the free money.

Some policy thinkers in the Northern Hemisphere are looking at other options, including 'QE for the people' or 'Helicopter Money' and 'Modern Monetary Theory' (MMT).

They are aimed to break the cycle of money printing pushing up asset prices, and instead would see Governments using that printed money directly to run deficits that could be used to invest in public infrastructure and services, or to simply increase incomes of those more likely to spend the cash.

All this money printing and stashing of cash and debating helicopter money was only interesting in an academic and remote way for New Zealand's central bankers and finance ministers over the last decade because New Zealand still had room to use 'normal' monetary policy of simply cutting the Official Cash Rate. That worked largely by lowering interest rates for households and businesses and encouraging them to invest and spend, hopefully on new goods, services and homes. That in turn worked, at least partially, to keep inflation from falling below the one to three percent range the Reserve Bank is mandated to target independently.

Things got real real very fast

But that remoteness all changed on Monday March 23 when the Reserve Bank had already cut the OCR to 0.25 percent and had to launch a $30b programme of QE to buy central Government bonds over the next year. That has since been expanded to $100b and includes buying of local government bonds.

So are the same issues seen with 'QE for the rich' overseas developing here? Is the money being spent or invested in the real economy? Or is it just inflating asset prices?

It's still early days here since our Reserve Bank only began printing and buying in late March, but the initial signs are not good.

Less business lending and investing, not more

The Reserve Bank has printed $32.2b to buy Government bonds from banks and pension funds since March 23. In turn, the banks have increased lending to households for housing by $4b to $282.2b, but have reduced business lending by $5.1b. The most business lending has actually been done by the Government itself since the lockdowns began.

The original idea was the banks would do the lending and the Government would guarantee it to encourage the banks, but that didn't work. However, fund managers have pumped money into existing share prices, and have bought some new shares by companies either repaying debt or restructuring to deal with Covid-19.

The Government was disappointed with the response to its Business Finance Guarantee Scheme, under which banks have lent small to medium enterprises just $111m since March out of an expected $6.25b. The Government’s own Small Business Cashflow Scheme has been much more successful, with the IRD lending almost $1.7b to over 100,000 firms in the last four months. 

Getting back on the housing horse

The banks have been much more active in the housing market, including $5.2b in July to existing home owners and rental property investors, up 24 percent from June and back above its pre-lockdown levels in March. That has helped perk up housing activity and lifted house values in areas with housing shortages and that are less reliant on overseas tourists, students and investors. Values in places such as Rotorua, Wellington, Whanganui and Palmerston North are up by double digit amounts from a year ago, while Queenstown is sharply lower. 

The Reserve Bank is beginning to agitate with the banks about the lack of lending to businesses and may yet try to force them to direct lending to businesses. Governor Adrian Orr used a speech in Wellington on Wednesday to encourage banks to help the economy recover from the Covid-19 shock.

“Banks must be part of the economic recovery and they must contribute to New Zealand's economic success because they benefit from New Zealand's economic success,” Orr said.

“And for monetary policy to work most effectively, the risk models, the tools and frameworks that the banking system have to do their job as usual, need to be switched on, and need to be used in a sound sensible long term framework,” he said.

“This is not the time for short term profit maximisation or cost cutting to dominate and it's the time to be using those models for what they designed for -- the allocation of resources. Showing courage is not to simply saying yes during good times and no during bad times. Courage is about being consistent on your risk appetite statement, being transparent and being honest and being held to it.”

Strings attached?

The Reserve Bank is now consulting on its Funding For Lending scheme that would operate in tandem with a negative interest rate to lend freshly printed money at negative rates to banks, potentially with ‘strings attached’ on where the banks should on-lend that money to.

Reserve Bank Head of Economics Yuong Ha, who is also a Monetary Policy Committee member, has said a no-strings-attached scheme would be most effective, but increasingly the highest echelons of the Beehive are worried  noises coming from the top floors of the central bank and the Beehive suggest the scheme may try to force banks to lend more to businesses by attaching 'strings' to the Funding for Lending scheme. 

Finance Minister Grant Robertson is also taking a closer interest in the risk the money printing could just inflate asset values and not help the real economy. He said he wanted to see the Reserve Bank analysis of the effects.

Orr, however, was undaunted by the risks his money printing will increase inequality when he spoke this week. He still sees it as his main tool in the main game of ensuring unemployment doesn't rise too much.

"Do interest rates simply result in ever higher asset prices and further this wealth divide that people talk about their own social well-being. This is a real issue and one that the Reserve Bank itself is being doing a lot of thinking about," he said.

"It's not unique. Many central banks and any policy shops are thinking about this as well globally. And we do need to understand the distributional impacts of monetary policy and think about what the implications are for other policies and our own actions.

"We do acknowledge that low interest rates for a long time will support asset prices will lead to a sense of increased wealth and hence a higher desire to spend and invest. That is one of the channels of monetary policy. It is a deliberate outcome, but it's only one channel and it's only one activity that could happen on the way through.

"Again though, we have more than comfortable and being aware of it and talking openly around what what policies might mitigate or manage these types of risks. But our first and foremost best effort to support wellbeing at the moment is around supporting job security, predictable incomes as best we can with our tools.

"These are the things that have the most immediate beneficial impact on economic well-being. Unemployment is the single largest loss of household income. It is the most immediate and detrimental impact in regard to economic wellbeing and inequality in any society."

So where has the money gone so far?

Despite the Governor's optimism, the early signs of the New Zealand experience are not good. 

The banks themselves have increased lending to housing, but not to businesses. The net lending growth has been around $1b of the $32.2b pumped into the system by the Reserve Bank.

Businesses themselves have also increased their deposits with banks by $4b. Household deposits have risen $7.3b since the onset of Covid-19, while the bank's deposits with the Reserve Bank itself have increased by $17.6b. That means only about 10 percent of the money printed has so far filtered out into the real economy.

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