Quantitative Easing, what's your view?

QE has been in the news a bit lately, with the RBA mentioning it as a possibility. So what are your views:

• Will it happen?
• What form will it take?
• What will the effects be?
• Will it push up inflation?
• Will it change customer confidence?
• What will its impact on interest rates be?

I don't think it's all that likely that there will be any meaningful QE, but if there was, it would have quite a positive impact on yourt of us that carry a lot of debt

 

1. Most likely not, given globally the trend is moving from QE to QT
2. By definition, RBA would create dollars to purchase financial assets
3. Increased liquidity and push up asset prices. Tailwind for most asset classes
4. This one is interesting. Despite nearly a decade of QE across the world inflation has been docile. Don't know enough on the matter but I think the reason is that the QE liquidity floods towards assets (eg: property, equities markets, private equity) that aren't measured in the inflation data. Meanwhile, things like consumer goods, utilities etc aren't significantly impacted
5. Probably a positive for confidence but not directly. Finance stuff just don't interest most people. The knock on effect is probably a "stabilising" affect on the economy at least in the short to medium term. Of course, QE itself could just be kicking the can down the road.
6. If the last decade is a blueprint, downwards bias

 

Another consideration is the pending Federal election that will have the RBA reluctant for change during April & May unless absolutely necessary. Depending on Xmas & 2018 4th quarter data, that doesn't leave much opportunity for change. Therefore, IMO, unless the data is significantly outside expectations, the current status quo is most likely to continue through to the next election.

The previous indicators were leaning towards QT next move but the most recent data suggests that's now increasingly less likely. Unless we see some form of global financial shock, I don't see change on the horizon. Additionally, I doubt the RBA wants to be seen to be backstopping the current property market correction as its been long overdue.

My 2 cents.....

 

A characteristic of capitalism is the occasional periods of "creative destruction". This is to clear out the unprofitable/obsolete/zombie businesses and create capacity for others to form and grow.

In other words, recessions are part and parcel of capitalism.

Might be a bit controversial, but I don't think it's in Australia's long-term best interest to have monetary policy engineer a solution that aims to stave off recession for as long as possible.

 

This much is very true. The world constantly seeks a rise in inflation so they can neutralise rates but QE never achieved this and ultimately it's just bubbled a range of key assets. No one in the reserve banks actually understands what their impacts have done till now.

 

Libor/OIS spread about to blow, it's a signal to the overseas funders that Australia has a willing capacity to do whatever it takes to underwrite housing lending, through RMBS issuance at capped BBSW margins. That's the way I read the underlying message of it all.

 

QE wont happen and isn't needed in Australia.

The papers have run out of stories to print and are making up "hysteria" to get clicks.

We have plenty of room to reduce rates if the market slows down too much (or they can re-introduce the 50% LTCG discount for expats living and working overseas....and i'll gladly purchase more properties but until this changes we aren't interested in purchasing more only to pay 41%-45% in tax).

 

Nice OP question! My team and I spent a couple hours rambling about this over drinks a week or two ago (we clearly have too much time or need to get more interesting lives).

1. No it won't happen. Well I certainly hope not. There'd be devastation in the economy, jobs lost and a massive recession if this actually came about. I like Australia the way it is and don't want financial lives ruined on mass.

2. What form will it take is interesting. I assume they'd buy up government debt first (same as US). Beyond that, state debt. Beyond that, possibly mortgage securities to directly flow liquidity into this market. I doubt it though, too risky & I'd imagine they'd be worthless given the need for QE in the first place.

3. Yes it'll push up inflation and reduce the long end of the yield curve. For mortgage holders, this will significantly lower long term fixed rates (i.e. 5 year fixed rates will be similar to 2-3 year). Should technically flood liquidity in the market and lead to additional risk taking. Property boom should follow technically.

4. If its required, consumer confidence will be at an all time low. Will it change that? Presumably.

5. Long end of yield curve will flatten.

 

See, this I don't get. Without wage growth, and I cant see much wage growth happening should your scenarios occur, how would a property boom occur? I think it's quite clear that affordability, even without the recent servicing issues, is an issue.

 

Because the price of credit will fall. Rates may start with a 1.XX or early 2.XX.

That means affordability improves dramatically at least in the short run.

 

I'm assuming that due to additional nominal $AUD being placed into financial market, these $AUD has to find a place some where (i.e. various investment assets classes). There will be a flow on affect into equities and real estate just as it did with US markets post GFC

The average wage may not increase, but there will be more ability to obtain credit in the market.

People who hold real assets are the winners in QE, cash holders are the losers.

TB

 

Yep the incentives change. By reducing the yield on cash to very very very very low, you encourage cash to move to higher risk assets.

The term 'search for yield' was used a lot a few years ago, reflecting incentive driven behaviour to take on risk. This was the point of QE, to encourage risk taking and growth.

Its reasonably blunt though, as it inflates nominal assets a lot and has questionable impacts on 'real' activity. Nonetheless, having a really low rate, especially long term, should drive up more infrastructure projects, etc (real activity).

 

If RBA does start QE, I take it we should all be maximising our borrowing capacity

 

I'm beyond maximised, so I'm hoping they'll go ahead, though I see it as very unlikely.

 

If I needed to quantify what I think the likelihood of this is in the next couple years, id have it close to 0% (0.05%). But its an interesting topic point nonetheless!

 

Sort of.

Bankruptcy is a part of capitalism, yes. In this way, those who destroy value (ie consume resources without creating anything of value) go out of business. And resources are rationed and preserved in this way under capitalism.

Conversely, resources are squandered and misused under socialism, because there are no price signals (such as profit/loss) to tell them when to stop doing something.

A recession is different and not necessarily part of capitalism. A recession is when bankruptcies occur in a cluster - ie all at once. This is not produced by capitalism. Under capitalism, there is bankruptcy all of the time, but it is only when policy goes horribly wrong do businesses go bankrupt all at once.

The 20th century economists understood that it was central bank interference in the business cycle that causes recessions. Not capitalism.


One other small correction: "inflation" is the process of creating money - it is not simply "higher prices". Higher prices are the result of inflation. We have hollowed out the definition of inflation, which is part of the reason why we fail to understand it.

 

1 in 2000, I'll take those odds, better than the lottery.

 

But borrowing capacity doesn't really improve with rate cuts anymore- unless assessment rates are reduced as well.... so cash rate reductions pose no real risk of a property boom anymore. The best reason for cash rate reductions is to cushion the IO to P&I migration ( to prevent delinquencies and further loss of consumer confidence) and to inject extra surplus cash flow into P&I households that can be used ( hopefully) for consumer spending .... but I would imagine that even if they reduced rates to 0.5% it wont drive property prices - at least not in SYD and MEL....maybe in cheaper locations...maybe. But with DTI ratio's effectively capped at 6-7 x income prices can only ever get so high no matter how the rates....

Very interesting that the RBA would even be mentioning such things though. I think they're quite worried about the price slides and the drop in consumer spending, car sales etc.... odds are now better than 60% of early 2019 cash rate reduction methinks. Lets see what the Xmas data looks like....

 

Its worth noting that RBA's Oct financial stability review paper has 85% of borrowers not going near their maximum borrowing power. 70% don't even come close to it.

Halving the price of credit will have a large impact on prices, its just an extreme response, regardless of the relatively limited impact on borrowing power.

 

Also, improving borrowing power would happen before QE starts kicking in.

I.e. regulators would try to allow credit to flow long before QE kicks in (QE must be like 100th on the list of policy responses!).