QE on the agenda again

So as interest rates are lowered again by the Reserve Bank of Australia in a bid to stimulate the economy, we are still seeing economic activity stall. Whilst Australia has 28 an unbroken run of nearly three decades, this run of constant growth appears to be coming to an end.

As the interest rate on government secured bonds fall, a demand for bonds as an asset increases. By the Reserve Bank of Australia purchasing a high volume government bonds, the intention is to push down interest rates to such a low level that banks are better off lending money to businesses and households than holding cash.

The Reserve Bank of Australia is spending large quantities of newly printed cash to ease monetary policy. Government workers are not receiving pay rises, the private sector is not competing for talent with the public sector so the government is not under pressure to raise salaries and conditions to attract workers.

As an unintended consequence of the banking royal commission, tighter lending standards leading to higher levels of risk aversion made it increasingly difficult for lenders to take advantage of historically low interest rates to increase cash in the economy.

Low international interest rates are designed to increase the degree of investment and speculation in the economy by private enterprise leading to economic growth. This is not happening, once official interest rates hit 0.25% then the Reserve Bank of Australia will consider more unorthodox practices - that will be quantitative easing.

Generally speaking, an increase in money supply results in higher inflation. Yet, this has not occurred so one has to question why this has occurred. The US Federal Reserve and European Central Bank have engaged in quantitative easing for what is regarded as successful outcomes.

The Reserve Bank of Australia has lowered interest rates to historically low levels and this has still failed to stimulate the economy. Economic growth has stalled, unemployment has increased to over 5% and wage growth is non-existent so I think we will be headed into QE mid to late 2020.