Tag Archives: RBA

Your Honour, The Fight Started When I Punched Him (Back) 🙄

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.

Steps

  1. the RBA credits government accounts with $X by marking up accounts electronically,
  2. Treasury issues bonds (more or less) to the value of $X.
  3. Traders in the Primary Bond Market bid and acquire the available bonds,
  4. 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

Understanding Reserve Bank of Australia Interventions (Wonkish)

In what follows is, I hope, an explanation of the recent Reserve Bank of Australia (RBA)’s $8.8 billion intervention into the Australian financial markets. The RBA, like other Central Banks across the world, sets a specific short-term interest rate, also known as the Cash Rate, which is at 0.5%. This is the rate at which commercial banks lend to one another in the money markets. It is not the rate at which banks lend to you or I when we borrow for a credit card, personal loan, or mortgage.

Consequently, the RBA as a setter of its Cash Rate allows the quantity of monetary aggregates to float.

The cash rate is the price for borrowing; the reward for lending between surplus and deficit commercial banks. Consider that the banking system as a whole cannot resolve a system-wide surplus or shortage of bank reserves, much like a game of hot potatoes. If there is an excess supply of bank reserves, that puts downward pressure on the Cash rate; an excess demand puts upward pressure. To maintain its desired Cash Rate, the RBA must use open-market operations to increase/reduce the supply of reserves depending on money market decisions.

Given recent fears of a possible recession in Australia, there has been disruption to financial markets. Keynes’ liquidity preference theory offers a useful explanation for some of the behaviour that we have seen. Cash is the most liquid of all assets, and an asset’s liquidity can be seen as its convertibility to cash. On one hand, treasury bonds are not much different from a term deposit with a bank, so both will have similar liquidity. On the other hand, housing is a highly illiquid asset: There are substantial transactions cost to selling a house to get cash as well as other barriers. Regardless, for Keynes, if liquidity preference rises – that is, people’s demand for cash or ‘money’ in general rises – there is upward pressure on interest rates, downward pressure if liquidity preference falls. How this plays out is that people holding assets such as treasury bonds or corporate bonds will sell these assets as their liquidity preference rises, which puts downward pressure on their prices. There is an inverse relationship between a bond and its interest rate. Hence a lower price increases its interest rate.

Yet, our Central Bank – the Reserve Bank of Australia – has a Cash Rate of 0.5%. Given the arbitrage opportunities that come with different interest rates, the RBA must intervene in the financial markets endogenously to maintain control over interest rates. In other words, through what is called the repo market (repo is short for repurchase agreement), the RBA becomes the buyer of the treasury bonds to put upward pressure on their prices and stabilise yields (which is their interest rate). At the same time, given that there are more reserves in the banking system as a consequence of such open-market operations, the RBA maintains control of its Cash Rate.

It is important to understand that this is not a ‘bailout’ of the financial system per se. Open-market operations do not change the net financial assets of the private sector. If the RBA purchases treasury bonds from the private sector, the private sector holds fewer bonds and more reserves. One asset is exchanged for another. The private sector altogether is not any wealthier as a result of open-market operations. What about income flows? Well, if interest rates fall, it is a rise in disposable income for borrowers but a fall for savers, and vice versa if interest rates rise. There is, of course, an indirect impact on net income flows of the private sector which is through federal government interest payments. If interest rates fall, the private sector as a whole has lower interest income because interest payments on ‘public debt’ fall, which translates into reduced interest income for private-sector recipients.

More accurately, a bailout is fiscal policy. Fiscal policy can change the net financial assets (NFA) of the private sector, increasing NFAs through deficits and decreasing NFAs through surpluses. We also have to include the external sector (the rest of the world from Australia’s point of view). Moreover, the budget balance is largely endogenous.

Tax receipts are driven largely by changes in economic activity while many forms of public spending are also endogenous. So if the private sector tries to go on a saving spree (Keynes’ paradox of thrift) and increase its net financial assets through a higher propensity to save, it will force the budget into a deficit (or larger deficit) through declining tax receipts and higher welfare spending as unemployment rises. So although causality can often run from a desired increase in NFAs, this increase can only be financed through public net-spending (budget deficits) or through foreign net-spending (current account surpluses, which means that the sum of the trade balance and net income balance is positive). But for the global economy as a whole, current account surpluses and deficits cancel one another out. As a result, for the world economy as a whole, private sector accumulation of NFAs depends on budget deficits.

 

Repost: Five (5) Things To Read To Understand Modern Money (MMT)

This is a repost of the original Five (5) Things To Read To Understand Modern Money (MMT) that has since been treated and edited and appears on RealProgressivesUSA.com

There is ‘much ado’ in the media, from business and economic commentators, about Modern Monetary Theory. Everyone from Adam Triggs to John Quiggin to Michael Pascoe and Richard Holden and even Andrew Leigh seem to have something to say.

Anyone that wishes to comment on Modern Monetary Theory is best advised to go to a primary source of the Modern Money developers. These include Australia’s own Bill Mitchell and Martin Watts, as well as many scholars from the University of Missouri-Kansas City, Bard College in New York, and other institutions. The full list has grown to be quite long, and this could never do a comprehensive list justice, but those that should be viewed as a primary source include Warren Mosler, Randall Wray, Stephanie Kelton, Pavlina Tcherneva, Mat Forstater, Scott Fullwiler, Fadhel Kaboub, Rohan Grey, Raul Carrillo, and Nathan Tankus.

A number of simple articles and social media threads are out there to clear up some perceived confusion about Modern Money. None of the commentary below is intended to replace over 25 years of academic work, which can be found at the scholarly institutions.

The first is 20 Simple Points to Understand Modern Monetary Theory by Warren Mosler. Mosler has published several books, explaining these further in mostly simple terms, but grasping the full intent of these points is essential to understanding how today’s Modern Money works.

Next, Scott Fullwiler elaborates on the differences between currency creation and the expenditure of currency. This nuance is frequently overlooked in discussions of Modern Money. Fullwiler shows the effect on central banks and the interest rates determined by central banks.

Thirdly, there are a number of Frequently Asked Questions that I have researched. They are questions commonly asked by those who are discovering Modern Monetary Theory for the first time. These include links to the Modern Money scholars’ accessible works, and links to financial commentary in the media for further reading, on any particular question that anyone may desire to delve.

Rohan Grey continues this list, with mischaracterizations and misconceptions of Modern Monetary Theory. Grey dives deep into how Modern Monetary Theory is applicable to ALL countries, its relationship to the role of institutions, and how it affects economic behaviour and its relationship to the law.

Fifth and finally Raul Carrillo addresses some other typical criticisms of Modern Monetary Theory. Carrillo demonstrates that Modern Monetary Theory is rooted in legal, sociological, anthropological, historical, and cultural foundations. Modern Money can offer insights into what we generally deem to be beyond monetary & fiscal policy. Ideas about labour, banking, development, ecology, inequality, trade & payments have consistently been part of Modern Money thought.

These simple references are to allay any source of confusion, with what media commentators are calling Modern Monetary Theory compared to actual Modern Monetary Theory. It is a comprehensive body of knowledge that is a synthesis of chartalism, credit money, Godley’s stock-flow consistency, functional finance, endogenous money, Minsky’s financial instability hypothesis and the work of Marx, Keynes, Kalecki, Veblen and post-Keynesian and institutional thought.

The textbook Macroeconomics by Mitchell, Watts, and Wray is for those who would like a more scholarly introduction. It is the textbook of the future.

Right to Work: Full Employment is Not What it Used to Be

The right to work movement has its origins in the 14th century. Nowadays, within a USA context, it is a term used for anti-union laws under the guise of a right to not be a member of a union. They are laws designed to limit organising and collective power.

Work on a lords land circa 14th century was usually for a subsistence living and the surplus-value of your labour (literally your harvest) was the property of the lord. The peasants that occupied the land were not its owners. Agrarian property was controlled by a class of feudal lords. There were limits on travel for working people, ‘Villeins regardant’ were usually granted plots of lands to farm for a subsistence and these plots along with those on them could be bought and sold. ‘Bordarri’ who were usually tradesmen/artisans were usually granted a cottage to live in exchange for their labour. Conditions of servitude were inherited and you were bound in perpetuity. Under capitalism, the exchange value disguises the use-value of your labour and the capturing of surplus value by the capitalist class is more opaque.

There was growing demand for wage labour (most likely because of the leaving of taxes demanded a necessity for the sovereigns currency) Waged-labour was more cost-effective than feudalist servitude as it absolved the owners of needing to house and feed their workforce. There was less direct need for surveillance and motivation came from the workers needing to obtain income.

As waged-labour became more common there were a series of laws through Britain and the rest of Europe to preserve distress amongst the unemployed. The notion that it ‘built character’, ‘unemployment acted as a motivator and increased the productivity of the working class’, and it limited what the capitalist class saw as ‘excessive wages’ as workers competed for scarce work.

There were laws that under the guise of ‘providing for’ or to ‘assist’ the unemployed acted as a mechanism for forcing the unemployed to take any job at any condition. Elizabethan poor laws, such as the system of Speemhamsland, which was a sliding scale payment tied to the price of grain, designed to mitigate against rural poverty but ended up as a wage subsidy and resulted in increases in the price of grain, leaving the poor no better off.

There were also workhouses during the 19th and 20th century. The unemployed would be required to work in dangerous conditions, usually in a factory, for their below subsistence welfare payment. Conditions were often so pernicious, it resulted in death. It is similar to today’s modern-day mutual obligation requirements under our welfare system. Welfare recipients are required to undergo Work for the Dole or Community Development Program (CDEP) for their below subsistence payment. It is mandatory and there have been cases of workers dying as a result of the conditions. The CDEP is often work for a private for-profit corporation.

By 1848 during the Second Republic of France and the idea of a ‘right to work’ had gained traction having been popularised over the proceeding decade by Louis Blanc. The abolition of unemployment was a goal of the Parisian workers who had backed the Second Republic. ‘National Workshops’ were established where unemployed Parisian workers could show up and be paid. The scheme was contentious and had divided the cabinet, that resulted in a chaotic scheme. Many within cabinet wanted political reform not necessarily social reform such as the elimination of unemployment and wealth redistribution. The municipal engineers organising the work resented the use of unskilled labour. Often there was no planned work for the idle workers they would be paid one and a half francs a day to do nothing or two francs when work was given. The program started at approximately 14,000 workers and within half a year and expanded to 117,00 workers.

False promises were made to expand the program throughout The Republic, however, the ‘right to work’ was withdrawn which led to what is known as ‘The June Day Uprisings’, warfare amongst the national guard and the workers which left thousands of protestors dead.

The ‘right to work’ movement reached the political discourse in Britain in 1889 and became a goal of the Independent Labour Party. Ken Hardie an ILP member in parliament breathed life into the unemployment debate. His maiden speech to parliament called for a policy on employing the unemployed.

“…we ought to have some permanent machinery to deal with the unemployed, the conditions of which should be twofold. In the first place it should be elastic. Labour should be organised in what he might call skeletal battalions, which might be filled in times of distress to their full strength, and which might go down again to skeletons when employment was plentiful. In the second place, the employment should be of a temporary character, and not such as to induce the recipients of it to remain in it in preference to seeking employment elsewhere”

The right to work and having the government act as an ‘employer of last resort’ gained traction across the political spectrum over this period. The choice for policymakers was, admit they had the capacity to employ the unemployed during downturns and they could set up works to do or they could leave the unemployed to face destitution and misery, risk electoral defeat or a social revolution. The conservatives came with a counteroffer found in the works of a conservative member of the House of Lords, William Beveridge in Unemployment: A Problem of Industry.

Beveridge argued in 1909 though unemployment was a result of the capitalist system it was only necessary to eliminate frictional unemployment and provide relief for the unemployed through unemployment insurance. The conservative alternative to Labour’s ‘Right to Work’ was a system of labour exchanges between the public and private sectors and a contributory unemployment insurance scheme. By 1911, this was the system in place in Britain.

In 1919 E.G Theodore, Queensland Premier with the Australian Labour Party attempted to pass the Unemployed Workers Bill. The goal was to place the full resources of the State and Local Government in the hands of a council dedicated to the elimination of unemployment. The State Government would undertake major works to increase the number of jobs, there were powers that would order private employers that could assist to augment their projects, while local authorities would delay or expedite programs to deal with the seasonal variations in the number of jobs available. The council’s role would be to undertake research and commission vocational training. Welfare payments were to be transitional while employment was being organised.

Naturally, there were objections from the capitalist class towards this goal. Headlines described this system as a ‘loafers paradise’ by The Courier Mail

“The so-called “Unemployed Workers” Bill and its extraordinary provisions were widely discussed in the city yesterday. Needless to say, the measure was very strongly condemned as a premium upon idleness…”

Mainstream media warned of communist atrocities and the perils of socialism. The bill never passed but we saw a shift in the language used by opponents of full employment. Whereas in Hardie’s 1908 bill we saw opposition to full employment, laying open the capitalist class opposition to a system of full employment by 1919 arguments were around how methods of achieving full employment were flawed.

Much of the ‘economic’ theories being used (Quantity Theory of Money; late 19th early 20th century, Loanable funds theory; circa. the 1930s) were funded by industrialist and used as justification on why full employment was ‘unachievable’.


Throughout history, there have been different ‘monetary systems’ in place. Today we operate under a ‘fiat’ system. (Literally Latin for by decree). A fiat monetary system is one where a sovereign power issues its own currency and floats it on an exchange rate for trade.

The monetary system in use during post-WWII was a gold standard. Governments would specify a particular amount of gold specie in return for the currency that they issue. Thus currency was limited by the supply of gold.

During war periods the gold standard was often suspended. This allowed a government to spend without concern toward the gold supply. During the Napoleonic wars, Britain entered a period known as ‘The Restriction’ which suspended the gold standard and they invested in building their navy and colonising half the world. Similarly, the gold standard was suspended over WWI and WWII.

During times of war, it is ‘normal’ to have all real resources, including labour in use. There is often a shortage of raw materials and labour-power. Hitler used a fiat system to build Germany’s military. Japan avoided a Great Depression because the Japanese Prime Minister, Takahashi Korekiyo, took Japan off the Gold standard in 1931, and introduced a major fiscal stimulus with central bank credit. (Jargon for issuing money without issuing a bond)

The Great Depression was largely a result of insufficient spending, being tied to a gold standard and opposition to full employment by the capitalist class. Full employment policies have enormous political consequences as the threat of unemployment is taken away. It ensures workers have higher bargaining power, politically we have more power to ensure greater provisions of public service, which erodes capitals claims on national income.


The period of WWII in Australia saw full employment in Australia. As I mentioned in this post. Australia experienced a period of a full-employment policy were unemployment seldom rose above two per cent. The work of J.M Keynes and his General Theory influenced most western policy towards achieving this goal. Full employment was defined as more jobs advertised than demanded (Beveridge curve) and Keynes ‘pump-priming’ was used to ensure aggregate demand (total spending) was sufficient with this goal. Keynes very clearly articulated unemployment was a result of insufficient aggregate demand. (Spending in total)

Pump priming is a mechanism where you stimulate the economy enough to increase the marginal propensity to consume and the additional spending reaches enough to generate full employment.

Conclusion

The right to work was once a goal of workers movements in France, Britain with the Independent Labour Party, and an early goal of the Australian Labour Party. It sat alongside universal suffrage and the eight hour day.

Systems of unemployment insurance were compromises over policy goals of guaranteed employment. Today the workhouses of the 18th century are back in a modern form (WftD, CDEP), the pernicious nature of making unemployment so unattractive so the unemployed take any available job, no matter how atrocious the conditions.

Full employment policies were introduced post-WWII though didn’t use a system of guaranteed jobs and provided unemployment insurance while workers waited for work to be created. However, there was a clearly defined goal of ensuring more jobs than work demanded.

This is an edited post originally by Jengis Osman originally published on Fighting Fish

Quantitative Easing in Australia (Wonkish)

For the first time in our country’s history, Australia has embarked on Quantitative Easing (QE). On Thursday, the Reserve Bank of Australia (RBA) slashed the Cash Rate to 0.25%, which is effectively the floor of the Cash Rate before hitting negative interest rate territory [1]. With QE, the RBA will purchase government bonds to drive up their prices and hence lower their yields to lower interest rates throughout the economy, particularly longer-term interest rates [2]. Some tabloid journalists have referred to this as ‘money printing’ or ‘monetising debt,’ but neither of these claims are true. QE, like other monetary policy operations [3], does not create what we call net financial assets. If the RBA purchases a government bond, it sells reserves in return. The commercial bank holds fewer bonds, more returns, but their net financial assets are unchanged. What changes instead are yields as the decrease in the supply of bonds pushes up their price.

What about claims surrounding ‘monetising the deficit.’ Usually what people mean by this is creating ‘new money’ to finance a budget deficit, which is inapplicable for a few reasons. First, if the RBA has a positive Cash Rate target, its supplying of reserves is non-discretionary and will increase or decrease when the demand for reserves changes so that the overnight interest rate aligns with the Cash Rate [4]. In other words, if we run through the scenario of the RBA directly purchasing public bonds as the government runs a budget deficit, the excess of spending over taxation would generate excess reserves in the commercial banking system. Such an excess would cause the overnight interest rate to fall to zero. In order to make the overnight interest rate match the Cash Rate target, the RBA would need to sell an equivalent amount of bonds (the RBA buys reserves in exchange) as it had purchased so that it eliminates the excess supply of reserves that it had initially created.

Second, the money (here I mean net financial assets) used to purchase public bonds is the result of deficit spending in the first place, which raises an interesting question of why we have a ‘public debt’ if the government is the issuer of Australian Dollars (AUD). Well, as part of the emergency response to the coronavirus, we have seen the ‘debt ceiling’ raised to about $850 billion [5], which makes it sound fairly arbitrary. The functional purpose of the public debt is not to raise revenue through borrowing from the public (people would have no net financial assets with which to purchase government bonds if those net financial assets did not exist in the first place through deficit spending on part of the treasury or ‘fiscal policy’ [6]) but, rather, to control interest rates. If there is deficit spending, there is a surplus on part of the recipients of the deficit spending. This means that commercial banks will have more reserves than before, putting downward pressure on their price (their overnight interest rate). To maintain a particular Cash Rate, government bonds are sold to the private sector to drain the excess reserves and so to prevent the overnight interest rate from falling. This happens to be equivalent to QE in not issuing bonds in the first place.

Will QE do much? I have my doubts. The idea of lowering longer-term interest rates is to raise the demand for credit to finance real investment on part of the business sector. The problem is that in a downturn, businesses will not invest if they do not expect to make money in doing so. Will refinancing effects allow for higher disposable incomes on part of households? Not if the assets that are the collateral backing the debt plunge in value (people will struggle to refinance if they are in negative equity).

In other words, shifting interest rates becomes akin to pushing on a string. As much as borrowing can be made cheaper through lower interest rates, the demand for loans must exist for credit to be created. During a downturn, people are less creditworthy as unemployment spikes and job hours are slashed, reducing the capacity for people to borrow. Businesses with fewer sales also have less creditworthiness. In this sense, credit expansion follows rather than leads the business cycle, intensifying booms and busts rather than stabilising the boom-bust cycle.

 

[1]. The way the RBA makes the overnight interest rate – the rate at which commercial banks lend to one another – align with its Cash Rate is through a ‘corridor’ system. In effect, because the RBA (usually) pays commercial banks 0.25% below the Cash Rate on their exchange settlement (ES) balances (the reserves that commercial banks have with the RBA), commercial banks with a surplus of ES balances have an incentive to lend them to other commercial banks at the Cash Rate because that yields more interest. By the same token, if a commercial bank wishes to borrow reserves directly from the RBA, they will pay a premium interest rate 0.25% above the Cash Rate, which provides them with an incentive to borrow at the Cash Rate from another commercial bank. This time, with the Cash Rate at 0.25%, the RBA has decided to pay commercial banks an interest rate of 0.10% on their ES balances rather than 0.00%.

[2]. https://www.abc.net.au/news/2020-03-19/rba-cuts-interest-rates-coronavirus-covid-19/12070494

[3]. Monetary policy is basically what the Central Bank does. The other arm of economic policy decision-making is called fiscal policy, which concerns government spending and taxation.

[4]. http://bilbo.economicoutlook.net/blog/?p=2943

[5]. https://www.fxstreet.com/news/australian-treasurer-frydenberg-will-lift-debt-ceiling-to-a850-billion-202003200630

[6]. The private sector can create ‘money’ in the form of credit but this is not a net financial asset because private-sector lending to itself creates a financial liability. In other words, as part of an endogenous money supply, this is called ‘horizontal money.’ Vertical money creation is sourced through deficit spending as it creates net financial assets.

As another point, to avoid confusion, public bonds and net financial assets are not equivalents per se. Public bonds can be a component of one’s net financial wealth, but this is a portfolio choice. In other words, if the government did not issue public bonds, the recipients would still see their net financial assets rise when there is deficit spending. To make this point in another way, if a private agent used private credit to buy a government bond, it would not have net financial assets. While the government bond is an asset, the loan used to purchase the bond is a liability that must be paid back. As explained before, why public borrowing tends to coincide with deficit spending is to maintain control over interest rates as an instrument of monetary policy. With QE, this function is obsolete because QE floods the commercial banks with reserves.