Reassessing quantitative easing
By Justin Pyvis – Delivered on 30 Aug 2021

Good morning! The big news at the end of last week was ATAGI finally getting around to recommending that children aged between 12-15 be included in the national vaccination rollout, a full five weeks after the TGA approved Pfizer for that age group. Presumably they must now be included in the national reopening plan, effectively setting it back by around 1.5 million people.

Following that announcement came Friday's national cabinet, where a few state Premiers all but confirmed they would not be reopening with NSW (and maybe VIC) when they reach a 70% or even 80% vaccination rate. Perhaps the most direct was WA Premier Mark McGowan, who said:

"The idea we would deliberately import the virus into Western Australia by dropping the border with a state like NSW would just mean lots of people would die and I'm not prepared to do that... we will need higher vaccination rates."

Victoria's lockdown was extended indefinitely on Sunday after reporting 92 new cases and NSW isn't getting out of its mess (1,218 new cases on Sunday) until its vaccination rate touches 70%, at which point only fully vaccinated people will be able to enter restaurants, bars and other hospitality venues.

For a more realistic idea of when COVID-free states might reopen (i.e. one not influenced by the politics that is NSW), look to Denmark: it's about to lift all COVID-19 restrictions with a total population vaccination rate of 71%, equivalent to about 89% on Australia's 'eligible adults' (>16yo) scale.

Across the ditch the Kiwis extended their full lockdown until midnight tomorrow, at which point all regions to the south of Auckland will drop down one level (which permits small gatherings). A decision on Auckland will be made later today but at the moment it looks set for at least another two weeks of full lockdown.


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The ASX200 (-0.03%) finished flat on Friday as traders waited to see what Fed Chair Jerome Powell had to say at the Jackson Hole Symposium.

It didn't disappoint – the US S&P500 added 0.88% after Powell doubled down on the Fed's intention to keep rates low and continue asset purchases until "substantial further progress" is made toward achieving maximum employment ("the 'substantial further progress' test has [already] been met for inflation").

Commenting on the "sharp run-up" in consumer price inflation (mentioned 89 times), Powell said "that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary".


Lockdown blues: Australian retail sales – which account for around 18% of GDP – plunged 2.7% in July, the largest decline this year. As you might expect the worst performing state was locked-down NSW, where sales fell 8.9% – the largest decline by any state since August last year.

China slowing: Profit growth at China's large industrial firms fell to 16.4% in July, the fifth straight monthly slowdown.

Consumer concern: The University of Michigan's US consumer sentiment survey for August showed a "free-fall in confidence", due to "rising inflation, small wage gains, and slower declines in unemployment". A full one in five respondents cited inflation as a real problem in their lives, up from one in twenty at the start of the year.

Inflation watch: According to the July personal consumption expenditure (PCE) price index, US consumer prices in the 12 months to July were up 4.2%, the most since the first Gulf War in 1991 and well above the Fed's 2% target.

Weimar watch: The cost of Germany's goods imports increased by 15% in July from a year ago, as "shipping [was] disrupted by resurgent coronavirus infections and port closures", forcing manufacturers into "passing on higher costs to customers". Consumer price data are released tonight and could show inflation running well above the European Central Bank's 2% target.

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Reassessing quantitative easing

Former World Bank, Clinton and Obama administration economist Larry Summers believes the Fed's quantitative easing (QE) programme is no longer needed.

Stepping back: QE is essentially the act of printing money and giving it to the banks in exchange for Treasury bonds and other government-guaranteed securities. In the US, the Fed buys $US80 billion/month of Treasury bonds and $US40 billion/month worth of mortgage-backed securities. In Australia, the RBA runs its own QE on a smaller scale – it currently buys $A16 billion/month worth of Treasury bonds.

Writing ahead of the Jackson Hole Symposium on Friday night, Summers warned that:

  • • by substituting short-term bank reserves for longer-term debt QE shortens the maturity of the government's liabilities, raising the risk of a debt crisis if interest rates increase;
  • • any private investment requiring 10-year interest rates below 1.7% is not likely to be high-quality; and
  • • buying financial assets is not the best way to inject money into the economy, as it "supports the wealthy who hold these assets" and further inflates asset prices "at a time when bubble risks are surely very high".

Why this matters: If Summers is correct, the Fed is doing more harm than good with QE. Even if the Delta strain causes some sectors to suffer, that cannot be "overcome by printing money", and may even increase inflation risks if it's supply, not demand that's most affected.

Looking forward: Summers argues that a major reason the Fed is continuing with QE is because of status quo bias – it wants to "maintain credibility given previous commitments", and has "faith in the ability to manage the situation down the road".

The problem is if the Fed is wrong, "precipitate change of a problematic course can be very costly". The longer the Fed waits, the greater the potential cost.

The Wrap Up
  • 💉 Israel made third dose COVID-19 boosters available to everyone aged over 12, provided their second dose was at least five months earlier. A "Green Pass" system will be used to grant entry into certain places, expiring six months after the holder received their second or third dose.
  • 🏢 Will the office ever be the same? "Just 100 Salesforce employees are working in the company's 61-story tower, San Francisco's tallest building, three months after the company enthusiastically announced its re-opening. That's down from several thousand before COVID-19."
  • 👩‍⚖️ The US Supreme Court threw out President Biden's "not likely to pass constitutional muster" rental moratorium extension.
  • ✈️ Virgin Australia is gambling on a rebound in domestic travel later this year, agreeing to lease nine more Boeing 737s over the next six months.
  • 🥝 Phew, crisis averted. "New Zealand police break up one-person anti-lockdown protest in Auckland".
  • 🐳 A 12-year-old boy made $US344,000 in one night by selling pixelated whales to thousands of, ahem, "crypto enthusiasts".
  • 🤪 TikTok banned the 'milk crate challenge' because, well, people are idiots and will crack their heads open for views.
  • ⚽ Cristiano Ronaldo signed for Manchester United, rejoining his former club for a fee of 15 million euros.
  • 😵 How was this ever a thing? "China's Supreme People's Court said the overtime practice of '996', working 9am to 9pm six days a week, is illegal."
  • 🚀 Elon Musk tweeted that Jeff Bezos "retired in order to pursue a full-time job filing lawsuits against SpaceX".
  • 🏎️ Max Verstappen won the Belgian Grand Prix, completing just two laps – the shortest race in F1 history – behind a safety car as torrential rain washed out the race.
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