Frydenberg “Having a Lend” when he Tells You to be Worried about “Borrowing”

When the treasury instructs the AOFM to get $X to fund government spending, the AOFM conducts a bond auction on the primary market. This means that they create new bonds and people buy them, and the money they buy them with goes into treasury’s account at the RBA and is then spent by the government, neoliberal economists call that borrowing. If the RBA were to simply buy treasury’s bonds or the treasury just directly issued funds into accounts at the RBA then neoliberal economists would call that printing.

The standard argument from neoliberal economists is that all printing is bad and will inevitably result in hyperinflation.

There are 2 obvious and provable flaws in this view though:

1) The reserve balances used to purchase the bonds were already on account at the RBA. They already existed and were already listed as a liability on the RBA balance sheet (this is public information on the RBA website). Since the RBA is just a branch of government, this means that when people buy bonds it is not like borrowing at all, it is like having a term deposit at your private bank. When you deposit $1000 at ING the balance sheet changes: their $1000 liability is your $1000 asset. If you move that $1000 into a term deposit, did they borrow $1000 from you? No, the balance sheet doesn’t show an increase in bank liability by $1000, their balance sheet liability increases by the amount of Interest they will pay you at maturity.

2) Almost all transactions in our economy occur in the private banking system. The only constraint on private banking are what’s called liquidity ratios: how much in government financial assets do banks need to hold in order to issue a certain amount in loans. In this context, reserve balances and government bonds are identical. Both can be used to satisfy bank liquidity ratios. So from the perspective of total spending in the economy, there is literally no difference between issuing bonds “out of thin air” and issuing reserve balances “out of thin air”, that is to say, the economic effects of what neoliberal economists call printing and what they call borrowing are identical…

Well, almost, ironically because the government typically pays higher interest on bonds than on reserves what neoliberal economists refer to as borrowing is actually slightly more inflationary than what they call printing.

The belief is that by having this absurd system the private bond market exerts discipline over government spending which, if it were a purely political process would result in pork-barreling. In other words, private citizens who have the most money already should be the ones to dictate how a democratically elected government should allocate resources for the social good.

As well as being utterly repulsive ideologically this is also completely false because the bid to cover ratios for every single bond auction (also public on the AOFM website ) show that demand for bonds exceeds supply by 2.5-4x.

The truth is that spending constraint is already legislated by the charter of budget honesty. So legal and political processes are perfectly capable of disciplining spending and do so already.

One thought on “Frydenberg “Having a Lend” when he Tells You to be Worried about “Borrowing””

  1. In essence when you buy bonds and the bonds mature the Reserve Bank just credits your bank account. A mere touch of the computer and the money is created to pay you. The Reserve Bank creates the money to pay you by the touch of a keyboard. Whether a fiscal deficit is financed by issuing Treasury bonds or directly by the Reserve Bank putting the money into exchange settlement private bank accounts on behalf of the Treasury makes no difference.

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