From the Chief Economist at the Bank of New Zealand

Discussion in 'Economics' started by ivanbaj, Nov 8, 2010.

  1. A different perspective on the US economy from Tony Alexander, Chief Economist at the Bank of New Zealand (not a central bank- written on 11/2/10).

    “This week there is a good chance that the Federal Reserve in the United States will announce that it is going to print some more money.

    The reason will be that the US economy has yet to find its legs and they feel a need to give some extra artificial support in order to buy time for the private sector to get back on its feet and spending again.

    That buying of time aspect is essentially all governments can do when they ease fiscal policy to help growth and all central banks can do when they cut interest rates or in this case take the extreme measure of printing money.

    In technical terms the operation is called quantitative easing and it does not actually involve any extra physical notes being printed. It goes like this.

    The US government is running a very large deficit near US$1.3tn. In order to finance it they usually borrow the money from the public.

    That means that the $1.3tn more the government spends than it receives in tax revenue is voluntarily taken out of circulation by investors in exchange for promises that they will be repaid the money plus interest some years down the track. The net cash effect is zero.

    Quantitative easing involves the Federal Reserve buying some of the bonds issued to fund the federal deficit. But the money the Fed. uses to buy the bonds does not come from private sector bank accounts.

    They simply make a note in their accounts that they have an asset in the form of US government bonds while the government marks a liability in its balance sheet. So where does the money printing as it were come in?

    Money that was going to flow from the private sector out of the system to the government does not do so.

    It stays put in other investments like shares and bank accounts.
    That effectively is the money which is printed – the stuff that does not leave.

    By staying in bank accounts etc. there is a net addition to funds circulating in the economy caused by the over-spending of the government – wages etc.

    Extra money sloshing around means extra downward pressure on interest rates which in theory will help the economy.

    In practice however a key thing happening in the United States which is keeping the economy weak is an unwillingness on the part of banks to lend more money exceeded in many cases it seems by the unwillingness of consumers and businesses to borrow it.

    Therefore the low interest rates which will stay around for longer may not have much effect at all. It is not the price of money people are basing their borrowing decisions on at the moment but their confidence – which is lacking.

    But the extra money sloshing around does not all simply sit in banks. Some goes into other assets like property, shares, and commodities. People are wary of property understandably given what has happened. There are many feeling the sharemarket is looking over-stretched when one considers the immediate prospects for growth look poor.

    That leaves other assets as potentially major beneficiaries of the Fed.s money printing exercise. We think these other assets likely to find favour are going to be predominantly found outside the United States. That means extra upward pressure on commodity prices by investors increasingly talking about a long term commodity price cycle in particular. It also means funds flowing into non-US sharemarkets and currencies and particularly those of fast growing developing economies. This is what worries the likes of China, Brazil, and many other countries who see their currencies as likely to rise against the greenback. This is where the big relevance to us comes in.

    Extra funds seeking non-USD dollar investments with a potential bias toward commodity-type assets are quite likely to push the NZD above US 80 cents within the next few months. And as we discussed last week there is essentially nothing sensible the Reserve Bank will be able to do about that. And for those exporters who are going to be affected by a stronger NZD it pays to think about it in the following terms.

    The greenback is weakening because the US economy is struggling under the weight of truly massive bad debts. Personally

    I prefer our combination of an overvalued currency and good Kiwi accounts to the appalling mess they are in which seems destined to get phenomenally worse in coming years as the Federal government one day starts to attack a debt situation rapidly becoming unsustainable. “
  2. ashatet


    Ask an American economist to explain QE and you will see a bunch of equations and Mathematics. Great explanation of QE.
  3. Can we get the actual link to this article please? I enjoyed the simpleness of the explanation as well.

  4. gucci


    After this sentence there is no point in reading the rest of the bullshit. It is fraught with bullshit assumptions. Now those splendid economists are gonna fix the economy.:mad: