Opinion: Managing the economy

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Nadi Chamber of Commerce and Industry president Dr Ram Raju makes a submission during the national budget consultation in Nadi. Picture: REINAL CHAND

Economists and finance types when given a chance like to stand up on a rostrum and pontificate about all manner of things.

One economic term given to jargon and ambiguity was raised at budget submission hearings in Nadi and Lautoka. The term is “printing money”.

The president of the Nadi Chamber of Commerce asked the Economy Minister why Government should not just print $1 billion and distribute it to laid-off workers, struggling families and businesses as a solution to Fiji’s COVID-19 down crisis.

The minister’s response was swift: “We are not in the business of printing money, but we are in the business of managing the economy.”

He went on to warn that money printing would debase the currency and lead to hyperinflation.

The next day at the Lautoka budget hearing the minister recapped on the “money printing” discussion in Nadi, repeating that Government was not in the business of printing money.

He took time to add some background on how money printing became part of the policy pandemic responses of some advanced nations.

He correctly linked it to the setting up of the “Bretton Woods” global financial system by the major international powers in 1944 when most developing countries today, including Fiji, were still colonies.

He did a fairly good job putting the discussion into some historical context, but it was clearly of passing interest to most in the audience who seemed anxious to get on with their submissions and head back to work.

To make some sense of the current global financial system, the trillions being spent by central banks to rescue their stalling economies, and possible solutions for Fiji I shall delve a bit more into history.

The new world financial order established at Bretton Woods, in the US, came into being at the end of World War II.

It was a fixed exchange rate system based on a gold standard. The US dollar became the “international reserve currency”.

For $US35 ($F75.49) anyone could obtain an ounce of gold. This was the standard to which all other national currencies set their exchange rates.

This system kept inflation in check for many years and gave rise to a “golden age of capitalism.

But there was a problem. New money could only be created with the addition of new gold – and gold was hard to come by.

This systemic flaw became a burden on the US. Faced with the challenge of paying for the Vietnam War, the US went ahead and printed more dollars. President de Gaulle of France objected and demanded the return of French gold reserves held at the US Federal Reserve.

In response, President Richard Nixon in August 1971 formally declared the end of the gold standard and replaced it with a “fiat money” system, one in which governments issued currency under their own laws (thus the term “fiat”, meaning by decree).

This money was not backed by any asset like gold, as in the Bretton Woods System, but simply issued into existence by Central Banks.

National currencies – essentially paper money with no intrinsic value – could fluctuate in their value against one another.

Suffice to say that when faced with economic challenges such as the 2008 Global Financial Crisis (GFC), advanced countries simply crank up their money machines to pump out billions of dollars to buy securities, pay money into the hands of their citizens and bail out banks teetering on the edge of collapse.

This is exactly what has happened in the COVID-19 pandemic crisis, but at a far greater order of magnitude. So far a total of $US9 trillion ($F19.41tr) in stimulus packages has been dished out in the US.

This takes us back to the million-dollar question about money printing raised by Dr Ram Raju. Why are countries able to create money out of thin air and why we in Fiji are not following their example?

The answer lies in another jargon-laid term: advanced countries are able to do what they do because they are “fully monetary sovereign”.

A fully monetary sovereign country can issue its own currency, has debts denominated in its own currency and maintains freely floating exchange rates.

These elements gift a nation with considerably more fiscal space than countries like Fiji, for example, whose debts are denominated partly or in some cases fully in overseas currencies and whose national currency is pegged to a basket of currencies meaning these countries have to closely watch their foreign reserves and inflation.

Many of our Pacific Island neighbours and some in Latin America adopt another country’s currency as their own.

Fiji and nations that are not fully monetary sovereign have limited fiscal space.

Quantitative easing (QE) is another jargon term for “money printing”.

QE is one of several tools deployed by central banks to achieve their legal mandates.

QE occurs when a central bank buys back from the secondary bond market government bonds previously sold to primary dealers on the primary market.

The high returns of up to 7 per cent per annum on government bonds for terms of between 15 to 30 years when in some countries bond yields have gone negative, means investing in Fiji government bonds is lucrative.

Those who have invested heavily in government bonds include insurance firms, commercial banks and our own Fiji National Provident Fund, giving rise to their healthy year on year profits.

QE can also occur when central bank overnight rates are set at or close to zero. This reduces the bank’s ability to raise or lower interest rates to influence the market.

With interest rate manipulation no longer an option reserve banks resort to influencing economic fundamentals by issuing quantities of money to ease stresses in the system – hence the term “quantitative easing”.

Surprisingly, despite trillions churned out by central banks around the world, inflation has remained stubbornly stagnant.

Quite a number of emerging markets and small nations with limited fiscal space, including Iceland (with a fraction of Fiji’s population), are using QE as a monetary tool.

QE puts resources into the hands of unemployed workers, hard pressed businesses and the needy and shores up ailing financial systems. QE, or money printing, which ever you call it, has been proven to be viable tools in the hands of competent central banks for managing the COVID-19 pandemic crisis.

Referring to “money printing” at the Lautoka budget hearing the Economy Minister said the Reserve Bank of Fiji had guidelines to follow in moving from one monetary tool to another.

With the prolonging of the crisis, and no visible signs of improvement, Fiji may already be past the trigger point for ushering in QE as an option for addressing the needs of the people.

  • Reg Sanday, a former economist with the Secretariat of the Pacific Community and SOPAC, lives in Nadi. He has worked widely in the Pacific Islands region for various regional and development institutions. The views expressed in this article are not necessarily shared by this newspaper.

 

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