Money creation by the Reserve Bank has been rightly blamed for contributing to our high inflation rate, but this is because the money has gone to the wrong sector of our economy.
Through quantitative easing (also known as Large Scale Asset Purchases or LSAP) the Reserve Bank created $55 billion and pumped it into an overstimulated financial market.
Surprise, surprise the cost of housing and other assets took off, along with banks’ profits. As the housing market was already overstimulated, the new money contributed to about one-third of the increase in annual inflation.
This was not a good way to use the newly-created money if the Reserve Bank was to fulfil its mission, “to enable economic wellbeing and prosperity for all New Zealanders”.
The Government also provided a $30 billion line of credit to the banks to lend to individuals and businesses. The intention was for the banks to provide stimulus to the real economy. The predictable problem was that businesses were reluctant to take on additional debt in times of uncertainty.
Add to that the banks could make more profit from the housing market and unless businesses could put housing as collateral, most missed out. Again, poor use of money creation by our Reserve Bank.
A wiser use of money creation would be for the Reserve Bank to provide it for infrastructure projects to fix our failing roads, schools, hospitals and three waters.
This option has been referred to as Direct Monetary Financing or Quantitative Easing for the People. Some pundits say it will be inflationary, but a Levy Institute paper titled, “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75” found no support for a relationship between direct monetary financing and inflation.
For forty years the Canadian Central Bank funded the construction of highways, airports, bridges, schools, hospitals, and other infrastructure with little or no impact on inflation.
Our own Reserve Bank used a similar approach to fund the construction of thousands of state houses in the 1930s which helped bring New Zealand out of the Great Depression.
Our Reserve Bank should stop providing money to our privately owned banks and put the money to work for the benefit of all New Zealanders. We also face a bigger bill in the form of climate change remediation. Direct Monetary Financing will enable us to meet this threat without saddling future generations with a mountain of debt.