Some three weeks ago there were two announcements. One by the Treasurer, the other by the (RBA) governor.
The Treasurer’s announcement (some $17 billion worth of chaotic stimulus ) was gasp-inducing and it (almost) stole the show from the RBA governor. But the governor was very clear in announcing two significant measures (in four points). The Treasurer, in turn, hijacked and subsequently obfuscated the governor’s announcements.
The RBA governor, Philip Lowe announced two things:
1) the (target) cash rate down to 0.25% and
2) Quantitative Easing. He announced a minimum of $90 billion of QE. What he also announced was “bond-buying” and targeting bond yields.
This is where the hilarity (and bastardry) begins. 3 (4?) days later the government announced an additional $67(odd) billion of “stimulus” (I call that support). AND the Treasurer displayed his adding up skills: 17+90+67=174. Well done him. 🙄
He added fiscal measures to monetary policy. He added a few limes to bullet train engineering. In order to boast with a “really big number”. Another gasp!
What he, and the mainstream commentary neglected is to explain the RBA announcement. To explain the fact that 2) QE and 3) bond purchases and 4) squeezing yields are the steps of the same operation.
Instead, the Treasurer added the sum of monetary operation (targeting bond yields) to the sum/total of a fiscal operation (injecting $84 billion into the real economy). Money- money, who cares, the learned commentators in the MSM can’t tell the difference between a duck and a lizard, both break eggshells.
But it does matter and it does matter for a number of reasons.
Let’s start with the QE part. The part the MSM calls money printing. Incorrectly.
- the RBA credits government accounts with $X by marking up accounts electronically,
- Treasury issues bonds (more or less) to the value of $X.
- Traders in the Primary Bond Market bid and acquire the available bonds,
- the central bank (RBA) buys the bonds from the traders (secondary market).
This is what the RBA announced and promised: “print” money and buy bonds. Yay! There is an inverse relationship between the price of the bonds and the yields they deliver. The RBA’s buying up the bonds is squeezing the yields, making good on its third announcement (promise) to target a yield of 0.25%. Nobody knows how many of the government bonds it needs to buy in order to hit its (yield) target. It could be 50%, it could be close to 100%. (Beside the point).
Here comes the really funny part: the RBA types numbers into government accounts, Treasury issues bonds to roughly match the RBA account typing, AND THEN the RBA buys the bonds. WTF? So now the bonds are on the RBA’s balance sheets. The bonds are now an RBA asset which pays interest! So when the bonds mature the government refunds the money to the bondholder (RBA) along with the interest (0.25%?) to the RBA. The RBA has just made a profit. Do you know what happens next? The RBA returns the profits to Treasury? OMFG!
Well, this is what QE is. In this case, it is a really opaque and weird way for the RBA to honour every government payment. And it is a really opaque glass for the government to hide behind.
It is essential to realise that the government’s large spending announcements (totalling over $200 billion) were preceded by the RBA’s very confusing QE announcement, and tell me I’m wrong: no *taxpayers’ money* was mentioned by anyone. At all! That is no accident.
But once the population accepted this deficit spending the government is hinting at intergenerational debt. And we all know how that particular narrative is worked …
Except we should all realise that it is a lie and that the majority of the newly issued debt is in fact held by the issuer itself. As Bill Mitchell put it recently, the right pocket is paying the left pocket.
Zoltan Bexley is a woodworker, armchair economist, sustainability and social justice advocate