I don't know how many times I must repeat the same thing: SA is a sovereign state that issues its own currency. Therefore it cannot fail to meet its obligations in its own currency, unless it chooses to do so. It cannot be broke or run out of money. Our monetary policy framework with one policy tool (interest rates) and one target (the inflation rate) is outdated.
SA needs a developmental central bank, with a dual mandate that combines price stability and employment. It has to expand its policy toolkit to achieve developmental objectives. The wide spectrum of possible policy tools includes monetary finance, central bank lending and quantitative easing (QE).
Monetary finance is an umbrella term that refers to a range of proposals — including QE for the people, helicopter money and sovereign monetary creation — that require co-operation between a central bank and the government to provide a direct injection of new money into the real economy that is not financed by the issue of interest-bearing debt.
It involves central bank money creation for public purpose, as opposed to commercial bank money creation for profit. Most bank lending for profit is not productive because it is largely used to purchase existing assets. According to these proposals, the newly created money must be invested in the real economy and not financial markets.
It can be used to increase public spending, capitalise development finance institutions (DFIs) or state-owned companies (SOCs), or transfer money to households. There would be a need for institutional mechanisms to ensure there is no abuse of the power to create money. In practice — according to Positive Money, a UK advocacy group for a fair money and banking system — this means the central bank should have no say on how the money will be used.
The government should have no say on how much money will be created. This decision must be based on an analysis of the economy’s productive capacity. If too much money is created, other traditional monetary and fiscal policy tools can be used to control inflation.
A central bank can also provide direct lending to the government, DFIs and SOCs on favourable terms without going through the bond market. The New Development Bank loan to the government has a five-year payment holiday until the economy recovers. There is no reason the SA Reserve Bank cannot provide funding to the government on similar terms.
During 2020, the US Federal Reserve provided lending facilities to non-profit institutions, state and municipal governments and small and medium enterprises (SMEs). The Bank of England provided loans to football clubs Tottenham Hotspur (my team) and Arsenal (my editor’s team). Central banks in China, the eurozone, England and Australia have windows that provide cheap funding for banks to lend to SMEs.
In advanced countries, QE mostly involved purchases of government bonds on secondary markets where existing bonds are traded. Many central banks in effect nationalised their bond markets and set the cost of capital. For the government, central bank purchases of its debt on the secondary market is not new money that will increase the deficit and finance new spending or stimulus.
However, as the Financial Times has pointed out: “There is no clear distinction between QE and monetary financing. Central bankers say asset purchases under QE are temporary, meaning that the newly created money will one day be removed from the economy. But it is hard to bind the hands of successors, who could one day make them permanent.”
Since QE money is invested in financial markets, the most important channel through which it affects the real economy is by reducing the government’s borrowing costs. The Reserve Bank can implement more aggressive bond purchases to further reduce the cost of capital and exercise more control on the bond market. But SA does not have a real central bank.
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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