Quantitative Easing by Stealth?

Opinion piece by Australian Senator Malcolm Roberts & Australian-American economist Darren Brady Nelson. 


Despite assurances from Treasurer Scott Morrison in October 2016 that Quantitative Easing (QE) would not be used to ‘support’ the Australian economy, published data from the Reserve Bank of Australia (RBA) appear to show a significant Aus-QE policy is already in place. Money supply statistics published by the RBA, such as M1, M3 and Broad Money (BM), suggest the government have been increasing money supply to “support the economy” for many years.

M1 is defined by the RBA as currency plus bank current deposits from the private non-bank sector. M3 is defined as M1 plus all other ADI (authorised deposit-taking institution) deposits from the private non-ADI sector, plus certificates of deposit issued by banks, less ADI deposits held with one another. BM is defined as M3 plus other short-term liquid AFI (all financial intermediaries) liabilities held by the private sector, except those held by other AFIs.

World-leading monetary economist Dr David Howden says M3 is the crucial measure because “broader measures of the money supply, such as M3, give a much better sense of the total money supply than some of the narrower measures”. Dr Howden is professor of economics, and Chair of the department of business and economics at St Louis University in Madrid Spain.

As way of background, the RBA “is the central bank of Australia” under s 26 of the Reserve Bank Act 1959 (Cth) and controls the money supply under s 8. Unlike the Fed which is privately owned, the RBA is government owned. Interestingly, the RBA is allowed to make a profit under s 30 and is not subject to any judicial oversight under s 87. Very importantly, as per s 10 of the 1959 Act, “[i]t is the duty of the [RBA] … to ensure that the monetary and banking policy … is directed to the greatest advantage of the people of Australia” as well as “best contribute to … the stability of the currency … the maintenance of full employment … and the economic prosperity and welfare of the people of Australia”. Very worringly, there is no explicit duty to ‘control’ inflation.

As shown in Chart 1 below (in AU$ Billion), M3 money supply has grown from approximately A$500 billion in the early 2000s to almost A$2 trillion by the mid 2010s. The Aus-QE trend mirrors the US, one of many countries that admit to undertaking QE. Chart 2 below (in US$ Million) shows that the Fed’s money supply has grown from just under US$1 trillion in the mid-to-late 2000s to approximately US$4 trillion by the mid 2010s, which is very similar growth to Australian M3 and BM of almost 300%. Noticeably, this A$2 trillion is over a third of the quantity of money supplied by the Fed of US$4 trillion, even though Australia is well less than 10% the population of the US.

According to Investopedia, QE is “an unconventional monetary policy in which a central bank … increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity” and is “considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes”. Unlike Investopedia, the Mises Institute defines QE as “a euphemism for an inflationary strategy of monetary policy pursued by [a] central bank” in which such a “bank adds money to its balance sheet ‘out of nothing’, and uses the new money to purchase government securities, thus increasing bank reserves, raising the prices of government securities, and lowering their interest rates” and is thus “equivalent to simply printing additional legal tender”.

Many of the greatest economists of ‘all time’ have recognised the massive economic dangers from large increases in the money supply, sometimes known as simply ‘printing money’ (usually accompanied by the ‘legalised counterfeiting’ know as “fractional reserve banking or lending”). These dangers include causing (or at least making far worse) both economic ‘booms’ and the resulting ‘busts’, as well as the rising ‘cost-of-living’ also called inflation. This was recognised in the award of the Nobel Prize in Economics to Friedrich von Hayek. Business cycles and inflation are actually ‘flip-sides’ of the same cause-and-effect ‘coin’ of artificially rising values and prices effected by the cause of artificially rising quantities of moneys. The ‘boom-and-bust’ typically happens first, with its uneven and less general price rises, followed by the rising inflation, which is a general price rise and thus a loss of purchasing power for all especially the poor and middle class. Both of these phenomenon redistribute and destroy wealth and jobs, and thus create winners and losers, with the winners mainly being amongst the elites of ‘big banks’, ‘big business’ and ‘big government’ (and their mates in the mainstream media and academia) … and the losers of course being the rest of us.

Another economics Nobel laureate on ‘the Right’ (in addition to Hayek) of Milton Friedman said in The Counter-Revolution in Monetary Theory: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Even one of the greatest economists on ‘the Left’, John Maynard Keynes, thus warned in The Economic Consequences of the Peace: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”

Many in the mainstream media and even much of academia, mistakenly confuse one of the statistical measures of inflation – ie the Consumer Price Index (CPI) – with the underlying economic reality of inflation itself. This statistic is regularly produced by the Australian Bureau of Statistics (ABS). CPI has been rising quite a lot since 2000 but not as much as M3 as can be seen in Chart 3 … rising from an index of 70.2 in June 2000 to an index of 106.6 by June 2016, which is an increase of nearly 52%. Other statistics point to the other expected impacts from artificially inflating the money supply, such as: downwards pressure on interest rates, for the private and public sectors; upwards pressure on debt levels, for the private and public sectors (especially government debt); increased instability of, as well as downwards pressure on, Gross Domestic Product (GDP) growth and unemployment rates (ie boom-and-bust); as well as downwards pressure on the Australian dollar and upwards pressure on equities.

Note that CPI has many weaknesses including that it more-often-than-not understates inflation or the cost-of-living. Another weakness is that according to Murray Rothbard in Man, Economy and State: “[A]ny concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is … meaningless and illegitimate. … And if one is tempted to use poundage as the common unit of quantity, what is the pound weight of a concert or a medical or legal service?” CPI’s biggest weakness, however, is that explaining an increase in prices as being due to increase in prices is no explanation (of cause-and-effect) at all.

Also in October 2016, Senator Malcolm Roberts asked the Secretary of the Treasury (and RBA board member) Mr John Fraser during Senate Supplementary Estimates “does the Australian government, the Australian Treasury or the Reserve Bank of Australia have a transparent quantitative easing policy?” and added that “from what I have seen of the M3 money supply figures, there seems to be some quantitative easing going on”. Mr Fraser responded “no” and added that “M3 … was the clear focus in the mid-eighties” but “I have hardly heard the term since” and “it is just not a focus of monetary policy”. Nevertheless, the RBA continues to publish a monthly M3 figure, which it has done since July 1959, along with other monetary aggregates like M1 and BM, which it has done since the mid 1970s … but not M2 or M0 as in the US.

More recently in March 2017, Senator Roberts said to Mr Fraser during Senate Additional Estimates that “I remember that you dismissed—or I took it that you dismissed—M3” and then asked the following three questions: 1) “how much has CPI inflation increased in Australia since publication from September 1948 to December 2016?”; 2) “how much has M3 money supply increased in Australia since publication from July 1959 to January 2017?”; and 3) “is there a relationship—fully and/or partially correlated and/or causal—between the money supply as measured by M3 and inflation as measured by CPI?”. Mr Fraser responded by saying “I did not dismiss M3”. He went on to say “conscious that I might be meeting up with you today, I did look at the recent [M3] numbers all around the world, and it remains very flat” adding “over the longer term, Friedman made a case that there was a link between M3 and prices … [so] fiddle with money supply at your peril”.

Therefore, especially given Charts 1, 2 and 3 below (and the apparent correlation between Charts 3 and 1), the RBA appears to have a very strong prima facie case to answer to the people of Australia whether or not: A) the RBA has been undertaking Fed style QE or not? B) the Treasurer is aware, or approves, of any such Aus-QE? C) the RBA and/or the Treasurer believe that an Aus-QE is to the net benefit of most average Australians? At this stage, the short answers to these questions are: A) “yes”; B) “maybe”; and C) “no”. In conclusion, it has been asserted by Chris Leithner in his book The Evil Princes of Martin Place that: “The RBA does not fight inflation, it manufactures and maintains it.” To quote Senator Pauline Hanson, Treasurer “please explain”.

Chart 1

Chart 2

Chart 3


Senator Malcolm Roberts represents Queensland in the Australian Parliament as a member of Pauline Hanson’s One Nation party. His primary policy interests are in energy, tax, regulation and banking. He has qualifications in business, engineering and atmospheric gases.

Mr Darren Brady Nelson is an Austrian School economist, conservative-libertarian and Christian who lives in Brisbane Queensland but is originally from Milwaukee Wisconsin. He is currently the economic policy adviser to Australian Senator Malcolm Roberts of Pauline Hanson’s One Nation party as well as on the advisory board of LibertyWorks. He has also been an economic policy adviser for the American Republican party presidential campaign of Donald Trump.

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