Should the Reserve Bank of New Zealand print money?

Bernard Hickey wrote a very valid piece in the New Zealand Herald yesterday. The gist of his writing focuses on the RBNZ and the fact that it should be following other central banks in printing money – quantitative easing. In the 1930’s the RBNZ did inject money into the economy and this helped pull NZ out of the Great Depression.

Most people see the dangers of quantitive easing in the hyperinflation that may follow such an expansion of the money supply. However, if you look at Japan in the 1990’s (the lost decade) interest rates remained at near 0% and the printing of more money didn’t create inflation. Furthermore if you look at more recent examples you see the following:

US Federal Reserve, Bank of Japan, Bank of England, Peoples’ Bank of China, and the European Central Bank have printed a combined US10 trillion in the last 4 years and spent it on bonds, cash injections into banking systems. This normally happens when central banks run out of ammunition to stimulate growth – i.e. low interest rates and they enter a liquidity trap scenario. The graph below shows a liquidity trap. Increases or decreases in the supply of money at an interest rate of X do not affect interest rates, as all wealth-holders believe interest rates have reached the floor. All increases in money supply are simply taken up in idle balances. Since interest rates do not alter, the level of expenditure in the economy is not affected. Hence, monetary policy in this situation is ineffective.

Bernard Hickey suggests that it would be much better if the government borrowed from the RBNZ rather than foreign banks and pension funds. Also to print money to fund the deficit which in turn will reduce the value of the NZ$ and therefore make exports more competitive. Click here to view the full article.

2 thoughts on “Should the Reserve Bank of New Zealand print money?

  1. Simon February 28, 2012 / 9:59 pm

    Absolutely! We are a heavily indebted society why not print money? Our dollar would fall so would our levels of debt and we may even see consistent trade surpluses just like the Chinese.

    I do think that this sort of intervention could be a good idea however we may face similar risks to the Chinese. Rather than inflation the risk is likely mal investment.

    The other risk is increasing wealth disparity. Overall inflation may appear low but house price inflation would almost certainly occur and in general inflation robs the poor in favor of the rich. This little fact is not widely spoken but in my view is key to understanding wealth disparity.

    Put simply if you know that some sort of inflation is likely you borrow as much as you can and buy physical assets or shears in physical assets. This obviously heavily favors those with first access to capital. The rich. Continue this policy for decades and those in the know end up with all the stuff. That is where we are now.

    Quite possibly, just like bush fires in Australia an important component of sustainable capitalism is regular washouts. Perhaps not as severe as the great depression but certainly periods of significantly uncertainty and high interest rates would be useful to maintain faith in currency and purpose in investment.


  2. Simon March 1, 2012 / 7:53 pm

    In addition to what is written above with respect to upwards wealth transfer from the poor to the rich I would like to add that wage earners are in a weak position when it comes to adjusting to inflation and each delay is costly to them. Together, reduced or delayed access to capital and weak and delayed wage adjustment to inflation are a substantial burden for the poor and become effectively a significant subsidy to the rich.

    One can argue that the rich deserve it because of the initiative and creativity they employed to become that way. If they did. However wealth does have somewhat of a tendency to perpetuate itself and does not exist in a vacuum. It is only worthwhile in the greater context of society and it is beholden on society to consider inefficiencies and inequalities that burden its diverse parts.


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