How much income will be sacrificed for the lock downs will depend upon how quickly production (supply) and spending (demand) can be resumed. As always supply and demand will depend on each other and respond together. The more an economy is stimulated by way of government spending on relief and by monetary policy – lower interest rates and more money and credit supplied – the more demand will be exercised and be expected from the customers of businesses. And the greater will be their willingness to tool up and hire workers and managers to satisfy demands.
So much is almost common cause globally. Learning about how well the recovery is going and when the foot can best be taken off the accelerator will be necessary. But surely not until it becomes very clear that an economy is back to normal. That is producing as much output and income as it is capable of- without inflation. When and if inflation comes back, stimulus should and can be reversed.
And the steeper the path back to normal the less the lockdown will have cost in real terms- in income sacrificed. And the cheaper the government can borrow to fund its growing deficits, the less will the future interest bill on much increased issues of government debt.
Hence massive reliance has been placed on central banks in the developed world to print more money. Cash created by central banks in the form of the note issue and bank deposits with the central bank is government debt that does not ordinarily bear interest. Hence extra money issued by central banks has been used on a vast scale to buy government and corporate debt in the market-place in order to hold down all interest rates and to fund government spending directly. Now called politely quantitative easing – but money creation by another name. And to supply their banks with additional cash reserves so that they might provide additional credit on favourable terms to the private and government sectors.
Extra central bank purchases of government debt in the developed have even exceeded this year the vastly increased issues of government debt by the major economies. Hence we observe low even negative interest rates across the entire term structure of interest rates. Making issuing debt for some governments even cheaper than money. The future tax-payer in the developed world has not been made not hostage to a spending and borrowing surge of unprecedented proportions, outside of war time.
The self-same approach is called for in SA and for any economy with its own currency and central bank and for the same very good reasons. And with the same recognition that stimulus can be reversed when the time is right. Unfortunately, the SA Reserve Bank does not agree. It has consistently argued against the case for buying government bonds on an aggressive scale to hold down interest rates. Most recently it has suggested that QE is not only undesirable but impractical, until interest rates are at zero and deflation beckons.
The argument made is that bond purchases (or for that matter increases in Foreign Assets held by the Reserve Bank or declines in their government deposits liabilities) adds to the supply of cash in the system and would have to be fully sterilized by equivalent sales of securities by the Reserve Bank.
However there is never any compulsion to sterilize all such purchases nor any logic in doing so. The object of any bond buying would be to add to the money base by some well-designed amount to encourage the private banks to lend more. The banks might prefer to hold more cash supplied to them in reserve and if so would not have to borrow from the Reserve Bank making the repo rate possibly irrelevant. But this might call for still more cash to be injected and for interest rates to go to zero -helpfully in the circumstances of depressed demand.
Ideally the extra cash supplied to the banks would better be used to fund additional lending to the private and public sectors to encourage spending. The much fuller adoption of the loan guarantee scheme (potentially R200bn of extra bank lending) would reduce any potential demand from our banks for excess cash reserves. The scheme should provide the extra capital and as important the confidence to reboot the SA economy. It urgently needs a champion in the Reserve Bank.
Should the economy recover enough to threaten inflation targets the Governor could be providing good reasons why the monetary taps can be tightened as easily as they were loosened. Given his hard-won inflation fighting credentials these could be used to save the economy from avoidable distress – without prejudicing long term stability.