Quantitative easing is being promoted as the way out
of New Zealand's economic woes caused by the high kiwi.
Business editor Dene Mackenzie looks at the consequences of
Printing money is not seen by all as a panacea. Photo by
Green Party co-leader Russel Norman started a heated debate
on Sunday when he issuedsome solutions to address the high
value of the New Zealand dollar, including introducing
quantitative easing (QE).
The United States Federal Reserve is up to QEIII, where it is
printing about $US40 billion ($NZ49 billion) a month to buy
financial assets such as government bonds, thereby freeing up
more money in the system to be spent on other things.
The latest QE programme is on top of the $US2.3 trillion the
Fed has spent since 2008 on keeping the US economy afloat.
Freeing up of money is seen by the Fed as a way of
stimulating the moribund US economy as already its interest
rates are close to zero.
Since the global financial crisis (GFC), both the Bank of
England and the Fed have used QE to try to revive consumer
spending and economic growth.
Dr Norman is suggesting the Reserve Bank of New Zealand
should create credit to be used to buy earthquake recovery
bonds which would be set aside for the rebuilding of
Christchurch. The credit could also be used to replenish the
Natural Disaster Fund as the nation's safety net in the event
of future natural disasters.
The term printing money has been coined in the media as a way
of describing the influx of credit into the financial sector.
In reality, for the New Zealand Reserve Bank, the so-called
printing would be done with the press of a button on a
Dr Norman said international experience had been that QE took
place in stages, with the central bank monitoring the effects
of each round and determining whether further rounds were
warranted, and of what scale. The Green Party would leave it
to the expertise of the Reserve Bank to determine scale and
timing of QE rounds.
Since the GFC, New Zealand's major trading partners had
engaged in large-scale measures that had devalued their
currencies, he said.
"Our productive sector has been the first casualty and, along
with it, any chance of securing our long-term prosperity.
"The UK, USA, Japan and the European Union have deserted
traditional monetary policy tools in favour of successive
rounds of quantitative easing."
New Zealand could no longer afford to be a pacifist in a
currency war, Dr Norman said.
Craigs Investment Partners broker Peter McIntyre said it was
true that the US and UK had been printing money to buy
financial assets to stabilise their financial systems and to
keep interest rates low.
However, they were left with few options with their interest
rates already at record lows.
For New Zealand to introduce QE, it would have to buy
government bonds and the easing would achieve very little in
the long term.
"Putting money into the system would create a 'sugar rush'
but it would quickly wear off.
"When would they stop buying?"
Having a high dollar was not a necessarily bad thing. It
stabilised inflation, kept import costs low - important when
it came to things like oil and gas prices - and kept the
financial system stable, Mr McIntyre said.
On the other side, printing money was an inflation risk that
would eventually eat into the savings of New Zealanders,
cause higher mortgage prices and higher costs.
"You can't have it both ways.
"While the $US40 billion a month being pushed into the US
economy by the Fed seems a lot of money, the US had a $US15
trillion economy compared to New Zealand's $NZ202 billion
one," he said.
QE was introduced in the US as unemployment soared above 10%
and the country was caught up in a mortgage default crisis.
"The US has the world's biggest economy. It is important to
have it stabilised. Our economy is not at that stage."
Mr McIntyre said no-one appeared to have thought of what
happened to the extra money flooding around the system from
governments buying up bonds when the financial crisis eased.
Governments could either sell the bonds back into the market
or hold them until maturity and take a loss, he said.
Prime Minister John Key was dismissive of Dr Norman's
"If printing money made you rich, Zimbabwe would be the
richest country on the planet, and it's not," he told TVNZ's
Increasing money supply would increase inflation, which meant
interest rates, mortgage rates and business costs would go
"It means the cost of everything you buy would go up. It
means the price of petrol and the likes would go up. So yes,
it might bring your currency down, it might be a by-product
of that, but at quite a cost to the rest of the consumers."
It might work in a place like Spain, but New Zealand did not
have a crisis, Mr Key said.
"They could create a crisis for us, but we don't currently
What is quantitative easing?
Usually, central banks try to raise the amount of lending and
activity in the economy indirectly by cutting interest rates.
Lower interest rates encourage people to spend, not save. But
when interest rates can go no lower, a central bank's only
option is to pump money into the economy directly. That is
quantitative easing (QE).
The central bank does this buy buying assets - usually
government bonds - using money it has simply created out of
The institutions selling those bonds - either commercial
banks or other financial businesses - will then have "new
money" in their accounts, which then boosts the money supply.
The increased demand for the government bonds pushed up their
value, making them more expensive to buy. They become a less
attractive investment. That means that companies who sold the
bonds might use the proceeds to invest in other companies or
lend to individuals, rather than buying more of the bonds.
The hope is that with banks, pension funds and financial
firms now more enthusiastic about lending to companies and
individuals, the interest rates they charge fall and more
money is spent and the economy is boosted.