Rate Cut + 100 Billion Money Printing

The Reserve Bank cut the official interest rate to 0.10 per cent and announced a quantitative easing (money printing) of $100 billion (5% of GDP). The lower interest rate will make borrowing cheaper. The quantitative easing will devalue money and induce higher inflation. Both are good news for the property market. It is time to go shopping?

 

Quantitative easing does NOT mean printing cash. The RBA is not allowed to do this. QE means DEBT is reduced. Treasury through the RBA buys bonds or Treasury notes . ie Govt debt is ended and cash introduced in place

What would lead to that view ?

 

QE = asset purchases by reserve bank

"outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’. "

The outright purchase means the private sector gets cash in exchange for the asset. Where does the cash come from.....

https://www.rba.gov.au/education/resources/explainers/unconventional-monetary-policy.html

 

From nowhere I believe

 

It will lead to increase in M2, sort of the same thing as Mark have thought

 

Hehe. Presuming the exchange for cash is done digitally, then suppose the private sector all go the bank and very politely request the bank balance in prawns, lobsters and pineapples and their local branch does not have 100B in notes in the vault that day (maybe it's the day after pension day) and has to request a cash order from the RBA, and then suppose the RBA doesn't have 100B in cash in their vault......

 

The exchange of treasury notes is with authorised money market dealers that includes banks. At present as people are paying down debt bank holdings of notes has vastly increased. When Treasury does a buy back this forces lenders to have excessive cash...Which they need to lend. That puts a large pressure on lenders to...lend. Hence a stimulus. This enhanced lending is a qualitative easing and policy such as lesser rules on lending are part of that. The cash comes as a debt exchange with Treasury. Treasury may borrow it. But in reality its likley Treasury will issue bonds which are longer dated debt. See chart....

https://www.rba.gov.au/chart-pack/bond-issuance.html

Treasury are basically going from short term variable debt to longer term fixed rate debt if we use the typically borrower scenario

I beleive since the start of COVID the issues are 200b not 100b...And likely to further increase ? I believe the figure proposed in the budget was 1trillion+

 

Isn't the issue of bonds effectively an exchange which results in an increase of the overall supply of money and thus inflation (which is the goal)? Surely anything like this has to devalue our dollar in some regard in due course.

Having said that the AUD/USD pairing didn't respond that way yesterday...

- Andrew

 

It’s more about USD falling yesterday, market anticipating Biden win, hence bigger next round of stimulus.

Time for Australia to warm up to China, restart bilateral relations now without pressure from Trump or Pompeo.

 

Yes true, many things moving it I guess. Will be interesting to see how the markets react moving forward over the next few days...

- Andrew

 

Not really. QE is about the central bank creating bank reserves, ie liquifying the banks. It does this by printing money technically, but it doesn't really get into the system until banks lend it out. So you can have QE and restrictive lending practices which nullifies the QE. But it is still printing money, or more accurately lending money into the system.

 

As a former Treasury financial market dealer with a top 4 bank I dont agree. The RBA doesnt and cant "print money" but it can be called that in media but its really not. Banks have capital adequancy reserves and manage this through official dealers. Not direct with the RBA. The ODs are puppets in some way. Banks must deposit $X as a % of their book in official ways eg cash (0.1%), treasury notes, bonds etc. RBA through official dealers basically exchanged short notes or short bonds at low rates on buy back for longer dated bonds at a premium BUT due to low rates this may be a lesser rate. 10 years bonds are the "risk free" bond market. Longer and its higher risk and short is getting to cash. Buying back short securities leaves banks with net cash to ..lend. Its not unlike a borrower with 10 years to go on variable renegotiating to a 30 year loan at a fixed rate. The net debt is not actually changed but its term is. This then allows a multiplier that allows banks to lend more for longer since bonds have a lesser capital holding requirement to say cash.

The practice gets called "printing money" but its not that straight forward and certainly doesnt involve notes being issued and is a balance sheet three card marley. The RBA actions also have the effect of lowering market rates so the RBA can then drop official rates. Its the wheel pushing the hamster. But the total interest will balloon with the extended term. At a low rate

 

A lot of countries are doing QE now. If a country does not do it, its currency value will be too high, which is bad for the export industries and foreign investment. A country might be "forced" to do QE since everyone is doing it.

 

Not wanting to be a jerk - I worked at the RBA and APRA and like you as a govt bond and swap dealer at a bank as well as in the bank's leasing and treasury including running the team that forecast funding and capital capacity so I learned capital adequacy, funding and liquidity over my career.

The RBA can and does print money - when it buys a bond from a bank or the Govt it exchanges reserves for the bond. These are the actual accounting entries...

Dr Bond
Cr Reserves

The reserves it is crediting the bank it bought the bond from ... they are simply a book entry in the RBA's accounting ledger. This is by definition money printing.

With QE it is doing this outright. If it executed it as a repo or under the TFF then you can talk more about maturity change - but if it outrights buys a bond there is only the exchange of the newly created reserve with no maturity for the bond.

The RBA has always created/destroyed money via it's open market operations but since it has/had credibility on the cash rate target/rate paid on reserves it seldom needed to do much in the way of injecting/withdrawing liquidity via outright transactions to keep the overnight cash rate where it wanted it to be.

A few other technical comments:

-> In talking about capital adequacy and dealers you are confusing capital adequacy (as per Basel III) with liquidity (e.g. LCR). Capital adequacy is about having sufficient equity to cover the risk of loss and is roughly calculated as Capital / Risk Weighted Assets whereas liquidity is about having HQLA to survive the next 30 days with some assumptions about haircuts on realisations/loss of deposits etc.

-> Re "leaves banks with net cash ... to lend" this isn't strictly true since banks create deposits when they lend ... e.g.

Dr Mortgage
Cr Customer Deposit

But since the bank might lose the customer deposit when it is spent (e.g. to buy a house) they typically hold high quality liquid assets or reserves. This is what they mean when they say the fund themselves before they look to lend. Funding = deposits (liability) + debt (liability) + equity (liability). Reserves are an asset of the bank and are not funding. They can be used to buy assets from other banks/the rba/govt but they are not funding.

So if the RBA causes the banks to have a lot of reserves (e.g. it has been doing QE) ... and note: someone in the RBA/Govt/Banks has to hold the reserves by definition since these are the only counterparties to the RBA in the settlement system ... then banks can more safely make loans since they can take the risk that they will lose the deposit to another bank. If this happens they:

Dr Customer Deposit
Cr Reserves (with bank receiving the deposit).

This hurts their LCR ... but if they have a sufficient buffer they don't care since they are only losing reserves and they either have them already or can borrow them cheaply in the cash market (this is the market for reserves between banks where they are borrowed/lent on an unsecured basis - ie not repo).

What does this all mean?
-> Banks don't strictly multiply their reserve/HQLA (high quality liquid assets) balances since the banks as a whole create money (deposits) when they write the loan.
-> But banks don't lend unless they have existing funding (deposits, bonds, equity).
-> So if the composition of their book is relatively constant they effectively act like they do
-> -> But there is a limit to this relationship ... too many reserves and not enough assets to buy/write at a risk adjusted margin relative to the rate paid on ESA balances (reserves) will have no more impact (the rate paid on reserves is also a factor).

 

here's a good video about it, it is designed to drive interest rate down and stimulate spending and borrowing in term stimulate the economy

 

yes, and the banks need to exchange an asset for the reserves, which I assume is usually a low quality asset. What happens when the banks have handed over all the junk?

There must come a point at which it’s not worth exchanging performing assets for reserves that aren’t in demand?

 

I think of it the other way around, QE doesn’t drive rates down, private capital does. Private capital that is not being deployed and instead stockpiled results in an environment of low demand for capital. This requires rates to be lowered to incentive demand (borrowing).

The problem is, it seems that lower rates always result in asset price speculation and lending into hard assets. Private equity does what it wants, it seeks out return regardless. The QE that then causes asset inflation results in lower yields, this then destroys returns further and promotes more risk taking. The private capital then retreats again, it’s a vicious loop.

 

Anyone know the breakdown of where the 100b will be allocated to? e.g. home loans 35% business loans 40% car loans 10% credit card 15%

 

Yes, the scary thing about the so called money printing, is that central banks don't just print the money - they have to buy assets with it to get that money into circulation.

But this has three very pernicious consequences: 1) they are buying assets without real considerations about price, as a private sector actor would do (eg buying US treasuries at 40 year highs just to fund government deficits); 2) they are buying assets that no one in the private sector wants (30 year government debt), and thereby gives that asset pretend value; or 3) they are buying assets that the private sector does want to purchase, but they bid the price up on these assets.

If the central bank didn't do QE, some prices would rise (presumably interest rates) and some prices would fall. But at least rational profit seeking private actors would be making the economic decisions and conserving resources. The alternative seems to be asset price bubbles and excess capacity in all sorts of sectors of the economy that don't create value. We are at the end game where no central banker wants to take the punch bowl away - it will be too painful.

 

...and we give these clowns credence they know what they are doing. Anyone off the street could print off unlimited sums of money and spend it if they could but it doesn't make them a financial wizard. Central bankers are at the root of many of the worlds problems, deserving to be tarred and feathered than lauded as economic saviours. Just my 2c