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Reserve Bank’s ‘unconventional Tools’ Needed Now

The Reserve Bank needs to dig into its arsenal of ‘unconventional tools’ now and start directly purchasing new government issued bonds.

That would provide the government with a source of debt-free zero-interest money that it could use to fund the needed economic rescue package for people who lose their jobs and businesses suffering economically due to coronavirus.

The government's proposed fiscal package of around $12 billion dollars will probably instead be funded by borrowing from the private sector which will mean taxpayers picking up the tab for the interest payments and the repayment of the debt.

The interest payments on existing government borrowing already amount to approximately $4 billion dollars every year.

The move the Reserve Bank made today to cut the OCR to 0.25 percent was conventional but wrong.

The effect of that move was to put superannuitants and others who rely on interest as a major portion of their income under more financial stress as banks drop deposit rates.

Its next move, likely to be quantitative easing - the purchase of existing government bonds from banks and financial institutions who already hold them, will also be wrong and will only benefit the banks by allowing increased borrowing by struggling businesses thereby increasing their debt burden and threatening their longer term viability.

Quantitative Easing for the people (buying new government bonds directly) rather than Quantitative Easing for the banks would allow the government to fund a range of measures that would directly benefit those affected without the negative longer term effects of increased interest payments and debt repayment by either taxpayers or businesses.

It could for instance pay a wage replacement to all those who lose their jobs of 100 percent of normal weekly wages for those earning under $40,000 and 80% to those above that, until they find another job.

An equivalent top up could be done for those whose hours are substantially reduced.

A similar scheme could be put in place for small owner operator businesses such as taxi drivers, tour bus operators, tourist guides, and others affected by the closing of our borders to tourists.

Measures such as that would minimise the negative economic flow-on effects to other businesses, avoid a raft of business failures, foreclosures on properties, rental evictions, and even larger queues at foodbanks.

Central banks buying government bonds directly is a common occurrence in Canada, Japan and China.

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