The Australian government is increasingly buying up its own debt – not a taxpayer in sight

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1. I’ve recently (finally — it took me a while) finished reading your Macroeconomics textbook, Bill. Good timing, really, given the current climate.

   It’s been very clarifying where proclamations made by the usual suspects are concerned, so thanks for that and these blog entries which continue to debunk the orthodox framing and narratives.

2. The linked RBA page states that the purchases began on March 20.

3. Thanks Bill. Strong and clear and right on the cutting edge of the most important economic debate of our lifetime. Keep up the great work.

4. I’ve been on ABC journalists cases for a while to have you or Steven Hail on to explain how our monetary system actually works.

   I’ve sent in the question “Where do you think money comes from?” to Q&A several times for the panelist to answer. Intimating the two signatures on every note of $5 or more was a big hint.

   A small step on ABC radio to begin with. Onward and upwards

   I wonder if when the first electrum coins were introduced in Asia Minor 2600 years ago, the King had to repeatedly scream at his citizens, “No you silly buggers. I have to spend it into the economy on public servant wages, infrastructure projects and the like before these things enter the market place for any of you imbeciles to earn, buy stuff and pay taxes with it! That’s why it’s got my bloody head stamped on it.”

5. Bill wrote:
   “But it is good that this team is willing to run against the mainstream tide within the ABC and offer their audience some diversity”.

   4am in the morning, program named ‘The Signal’ (I’ve never heard of it) accompanied by garbage ‘muzak’ distracting from what is being said?

   I’d like to know if Ita would be willing to run the program when people are actually listening; I suspect not, and that censorship is well and truly alive on the ABC.

   Meanwhile Fran Kelly, just 4 hours later, is agreeing with politicians of all stripes that “the money has to be borrowed and repaid”, “it’s taxpayer money”, “there is no money tree” (implying the government has to tax or borrow in order to spend) etc etc etc. Same on ‘the Insiders’…at this rate we’ll all be dead before anyone in the general public understands MMT.

   Who gets to choose panellists on Q&A? No-one was actually able to explain how we can afford to transition to a green economy without imposing a carbon tax on the economy.

6. What I can’t see from the tables presented is the price(yield) which the RBA paid. So it would be nice to see what price the RBA paid for any of the April 13, 4 yr, 0.47% o issued by Treasury. I’d like to see what the trading profit actually is or at least an estimate.

   Based on my investment banking experience you need a bid to cover ratio well above one if you want to have a decent secondary market and the issuer Treasury in this case prices the issue accordingly.

7. “A currency-issuing government does not ‘save’ when it doesn’t spend nor when it spends less than its withdraws from the monetary system via taxation and other currency drains.” MMT needs to completely reject the gold standard language still being used to frame economic discussion. By implication and connotation, such language serves to reinforce, at the very outset of such discussions, a false and misleading household model of federal financial affairs. Currency-sovereign governments neither save nor spend, nor do they run budget deficits or surpluses. They either invest in their economies in particular ways by creating and infusing money into them (or invest in other endeavors like foreign aid or aggression), or they do not. “Spending,” which implies and connotes a draw down on something limited and scarce, has absolutely no meaning in a fiat money system. I’ve become convinced that MMT can only win economic arguments and change economic thinking if it insists on appropriate terms at the outset of economic discussions. Even Bill has a tendency to use antiquated gold-standard terminology before he hastens to clarify and correct it. Yet merely by repeating the language of monetary scarcity–spending and saving, budget deficits and surpluses, etc.–seeds are planted which then must be constantly uncovered and uprooted. Small wonder that MMT is so frequently on the defensive, first parroting error then trying to correct it, instead of clearly speaking from the outset, in its own accurate language, the plain and simple truths about fiat money.

8. Newton, do you think this is accurate language within the MMT lens:

   :Sovereign currency-issuing governments can issue debt-free money:

9. Yes. And your simple, accurate statement contains IMHO the key to everything else worthwhile in MMT. Who really cares, other than economists, if we come up with a more and more accurate lens through which to peer at neoliberal financial machinations designed to manufacture plutocracy and austerity? So what–there are far more edifying things to look at and mull over. On the other hand, everyone should care if it is demonstrated, as MMT has demonstrated, that the linkage of federally sovereign currency to debt is nothing but a pernicious, self-imposed policy decision implemented through a labyrinth of rules and regulations which obfuscate the stunning reality of fiat money…ESPECIALLY when it is proposed to be used on behalf of the average citizen or “the least of these” as opposed to shoring up the already rich or funding unnecessary wars. This core truth (axiom) of MMT, the availability of fiat money to meet pressing human and environmental needs, is about as revolutionary as political thought gets these days, yet there seems to be a lack of excitement, lack of enthusiasm, lack of mission and purpose even among many of the strongest MMT advocates. They’ve got a game-changer, a world-changer, on their hands, IN their hands, but you’d never know it listening to their customary academic, wonky, nit-picky discourse (Bill, of course, and a couple of others, excepted).

10. Not to worry Bill. MMT is already the mainstream macro used by the US Treasury and the Fed. Congress hasn’t got it on yet. But will, I suspect.

    https://www.nytimes.com/2020/04/15/business/coronavirus-stimulus-money.html

11. Bill, Fascinating to see RBA’s purchases on the various States’ bonds since March 20. In the case of Tassie you have a figure of $1.042 billion. They’re TCVM bonds. Isn’t that Victoria. TCV and TCVM are both Victorian govt bonds aren’t they? Similarly NSW bonds include both NSWT and NSWTT don’t they? Just trying to make sense of the Tassie figures. $1.042 billion is almost 20% of State borrowings. The total RBA purchases of TASC at $143 million might be the Tassie bonds issued by Tascorp P/L??

12. Dear John Lawrence (at 2020/05/27 at 8:50)

    Thanks for your comment and scrutiny.

    Yes, I had made a mistake in the coding that produced wrong figures for some states. I have now corrected the Table.

    Tasmania comes in at $A127 million.

    Thanks again.

    best wishes
    bill

13. I recently sent an e-mail to a labor politician with heavy economic credentials in which I asked if Treasury auctions bonds then remits all the proceeds to government to fund deficit, where does it get the cash to repay those bonds when they fall due. Assuming Treasury is not a financial institution with liquid assets of its own to call upon.
    I also asked if the Reserve Bank is the agency legally responsible for payment.
    His reply;
    “The short answer is that the Reserve Bank of Australia manages the payouts of government bonds/securities, utilising the Treasury’s liquid cash balance with the RBA.
    Ultimately, the government is on the hook for the money – the RBA only manages the payment process”.

    This still leaves open the question of where does the cash to repay bond/securities come from.
    Bonds are auctioned, the cash you would assume is “spent” (if spent is right word) by government to fund deficits so the cupboard is bare. The question is pretty clear and how the great unwashed would ask it.

    Following this blog for some time leads me to conclude the Reserve Bank will ultimately just type some large numbers into a spreadsheet press enter and voila, job done. No economic or debt effect visible or otherwise on government or the great unwashed now or into the future.
    As one of the great unwashed is my reading of the problem and the answer a little too simplistic

    Anybody like to supply the correct answer?

14. Ross
    All the government financing activities are conducted by AOFM, part of Treasury. The AOFM Annual Report has everything you need to know. There’s a cash flow statement on page 72 of AOFM 2018/19 annual return which shows the in and outs for the year. Future interest and principal outflows are set out on page 78 for instance, so it’s a simply matter to arrange payment, often by arranging for another bond issue when one bond issue matures. MMT is yet to grace the hallowed halls of Treasury. They could use the click of a mouse, but they still play the game and usually issue another round of bonds.
    I’m not sure you have the sequence quite right when you refer to bond proceeds leading to spending which then leaves the cupboard bare. Spending and tax collections are happening 24/7. If they need a top up, currently they might issue more bonds.

15. Prof bill, all over the world because of low interest rates pension funds and savers are having a hard time. Do you think central bank money creation can be used to top them up and alleviate their worries? Is it also possible to use the central bank to reduce the huge amounts of private debt all over the developed countries?

16. Two things; we need a mining tax. Billions foregone for not having such thanks to Peta and Tony. Secondly, Fran Kelly is nice and a smart lady but we need someone who will pick Josh up on his lies.

17. “Anybody like to supply the correct answer?”

    It’s the nature of the way banks work. What they do is mark up the accounts during the day and then *clear* the system towards the evening.

    All becomes clear when you understand that banks are really just pawn shops with better PR. What the banks do is post collateral at the central banks which the central bank then discount into currency flows if required to cover the flow of payments on that bank’s central accounts. The banks then lend to each other at the end of the day and the central bank drops out of the equation (at least as far as clearing is concerned). That’s what ‘clearing’ is – the central bank getting out of the interbank process.

    That collateral is government bonds normally. And Treasury does exactly the same thing. However unlike the commercial banks Treasury can’t run out of its own money…

    The correct question to the mandarins at the Treasury is what collateral do they post at the central bank to use the clearing system, where did it come from.

18. Thank you John Lawrence and Neil Wilson for your replies.
    I will attempt to delve into the nefarious workings of treasury.
    Sounds suspiciously like a ponzi scheme to me.

19. “Sounds suspiciously like a ponzi scheme to me.”

    No. It’s just the normal operation of a banking system. A loan is an asset to a bank. If you control that bank outright then you have the asset too – even if the liability is to the bank. That’s how a “currency issuer” is different from a “currency user”. When you owe the bank you don’t automatically get a balancing asset on your balance sheet because you own the bank.

    However if you did, you would. Think about what you could do if you owned a bank outright and could direct it.

20. Like your work, but have a few comments. 1. The RBA has not bought a bond since 6 May, and won’t buy again if market conditions remain the way they are (no gaurentee of that of course). 2. Govt bonds are usually bought for the exact opposite purpose of speculation – they are held as liquid, secure assets by bank balance sheets, super funds and central banks – they buy riskier assets when they want to speculate. Hegde funds do speculate with bonds by using leverage – but the AOFM scales them in syndications (hence why they only issued 19b out of 53b in bids). You do not need MMT to achieve full employment – governments could use standard fiscal and montary policy to achive this, but they chose not to (or voters don’t elect them).

21. Hi Bill,
    I thought the Signal interview was effective, it went from currency sovereignty to real resources vs inflation to democracy. Perfect!

22. George

    I think Bill’s point is that standard macro think would lead to increased taxes being required in order to “pay for” a full employment policy. MMT analysis shows you don’t need to do this to implement policy, provided the real resources are idle.

    The other point Bill has repeatedly made is that an economy can be in equilibrium with mass unemployment. Which means this is not something that will fix itself over time.

23. Hi Bill,

    Given the Fed has bought up so much of the state and territory government debt, could this be used by the Morrison Government to prevent certain legislation going through at state or territory level?

    And does the Fed government essentially backstop the debt of the state and territories and make them faux currency issuers if the Fed is buying up the debt and agrees to pay the debts of the state and territory governments?

    There’s an interesting article in The Guardian today about Victoria’s money from the AIIB to fund infrastructure projects (the McGowan Governmebt has also co-financed through this). I presume those deals weren’t done in AUD and rather done in Yuan, otherwise couldn’t the Fed just pay back the AIIB, of which it is itself a member, just not controlling member?

    Thanks so much.

24. Dear Adam (at 2020/08/27 at 11:25 am)

    Thanks for your comment.

    However, the ‘Fed’ hasn’t bought any state and territory government debt. The Fed is a US short-hand term for the Federal Reserve Bank. We should resist the temptation to use it as a generic terms for a central bank.

    best wishes
    bill