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RBA QE now driving Aussie asset prices up?

While the Reserve Bank (RBA) has resisted implementing Quantitative Easing (QE i.e. money printing) over the last 12 years, over the last couple of months that has changed. In the initial RBA QE program, $100billion of Federal and State government bonds will be purchased.

Over the last 12 years, in response to the Global Financial Crisis (GFC) major central banks around the world (including the US Fed, the ECB, the Bank of England and the BoJ have collectively embarked upon what is in effect, the historically most extreme money printing program ever seen.

In "normal" times, when governments print massive amounts of money, this causes very consumer price high inflation and/or asset price inflation. It also causes the local currency to fall sharply.

However, over the last 12 years in major developed countries, all this money-printing has not caused high official consumer price inflation - attributed substantially to the deflationary effects of the current technological revolution plus the intense competition-forces for good and services from globalisation + emergence of the developing world (which has a very large pool of cheap labour including a large pool of highly educated English speaking people). The Austrian School of Economics would also argue that the current historic-extreme private-sector (individuals and corporations) debt bubble is also highly deflationary.

While this tidal wave of money printing (QE) over the last 12 years has not caused much official consumer price inflation, QE has caused massive asset price inflation. QE causes asset price in a number of different ways:

  • Bond Prices rise. First, the immediate effect of QE comes directly from the mechanism by which QE is implemented. Central banks implement QE by buying government debt. This increase in demand for government debt, drives bond prices up (i.e. bond yields fall.) That is, interest rates fall. Because all other interest rates tend to be priced off government bond yields, this tends to drive all interest rates in an economy down.

  • Share prices rise. There are at least 2 major reasons why share prices rise in response to QE. A. Some of the money printed in QE, is used to increase the demand for shares, driving share prices up. When the central bank buys bonds from the banks, this results in a rise in cash at the banks. The banks then have more money to lend to those who wish to borrow - eg to risk-takers like hedge funds, speculators and others. Part of what encourages these risk-takers to borrow more funds is that the QE tends to push interest rates to near 0%pa. ( ) By borrowing more money , the hedge funds and speculators (etc) then have more money with which buy shares. The rise in demand for shares causes share prices to rise. B. Since government bond yields are a major input into the discount rate used to value income producing shares, lower government bond yields causes the discount rate for shares to fall, which causes the perceived value of shares to rise.

  • Property prices rise. Property prices rise in response to QE for the sames reasons that share prices rise in response to QE. Let me add one additional point, I have seen studies (probably referenced on my web site somewhere), that show that Australian residential prices have a very high correlation to the amount of mortgage lending that has occurred in the Australian economy. And clearly this year 2020, the Federal government has been seeking to encourage banks to lend more, and home owners to borrow more, because they know that over the short-term this tends to add to economic growth (Australian GDP). [In my view, with Australian private debt already at historic extremes, this policy of the Federal government will cause many new borrowers to lose vast amounts of money over the next 5 years or so - and so I do not agree with this policy.]

This COVID crisis year 2020, unlike the last 12 years, has resulted in major developed world governments embarking on historic extreme fiscal deficit spending. This major deficit spending has now been a super-charger to boosting the money supply, thus adding to the asset price pressures that have been solely driven by QE over the last 12 years.

Note: This article in the Financial Times ( "Quantitative easing and share prices" ) gives an example of some of the evidence for a relationship between how much money has been printed (QE) and US share prices post-October 2008. The US Fed Balance sheet is a useful proxy for the accumulated QE of the US Fed, because for every dollar that the US Fed prints, they buy $1 of assets which goes onto the US Fed balance sheet.

In this context, we should not be surprised that co-incident with the RBA's announcement that it was to commence $100billion of QE in early November 2020 , that from that date, the Australian share market has rallied quite strongly.

i.e. The RBA's QE program now seems to be driving the Australian share market up - and probably is now also pushing the Australian property markets up. A real estate agent friend told me last Sunday (13/Dec/2020) that "suddenly" the residential property market has become "hot" as buyers emerge from the woodwork in droves - This is circumstantial only evidence that RBA QE is now driving up Australian prices - but interesting all the same. RBA announces QE.

This web site also has the view that RBA (and BNZ) monetary policies are driving residential property prices.

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