Today (February 28, 2024), the Australian Bureau of Statistics (ABS) released the latest - Monthly…
There is a difference between a journalist reporting news about economics and money and a journalist writing an opinion piece. In the first instance, the responsibility of the journalist is to ensure they cover the topic in a balanced way, seeking input from all viewpoints if the topic is controversial, as most topics in economics are. Too often journalists in this situation allow themselves to be used as mouthpieces for specific viewpoints, sometimes because they are coerced by editorial deadlines. Often they just uncritically summarise press releases put out by some group or another and represent the material as fact. In the second case, when a journalist is writing an analytical piece they are holding themselves out as experts. Then they better get it right. Usually, when they are writing about macroeconomics they do not get it right because they merely rehearse mainstream thinking, which most people by now should realise is off the mark. A case in point was a recent Op Ed (represented as analysis) published by the economics reporter at the ABC (January 10, 2022) – How the banks may profit from the taxpayer as COVID quantitative easing winds down. It is full of errors that journalists make when they don’t exactly understand the material they are dealing with. This should have been worked out during the GFC, when these issues arose in the general media. The fact that the same errors are being made more than a decade later doesn’t suggest any learning has taken place.
Update on RBA bond-buying program
I last wrote about this topic in this blog post – Australian government issues debt, buys most of it itself, and then pays itself interest into the bargain (October 7, 2021).
After analysing the trends in the federal debt market I calculated the way in which the Reserve Bank of Australia’s bond-buying program, announced in March 2020 had impacted on that market.
The RBA deviated from its recent history and introduced a large-scale government bond-buying program as part of its pandemic support initiative.
The RBA, itself, sought to disabuse the naive commentators, who claimed the asset purchases were just ‘printing money’.
In its explanatory document – Unconventional Monetary Policy – the RBA wrote:
Asset purchases involve the outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’ (in Australia these are referred to as Exchange Settlement or ES balances). (Some people have referred to this as ‘printing money’, but the central bank does not actually print any banknotes to pay for the asset purchases.)
So, the RBA considers it is the height of ignorance to conclude that its asset-buying program involves ‘money printing’.
While the RBA said its policy was about lowering interest rates on risk-free assets and keeping bond yields low, they left out the other important point – for obvious reasons – that their asset buying program really amounts to one arm of government buying the other arm’s debt, which, in effect, once we cut through all the blather from politicians and RBA officials, is funding the fiscal deficits run by the level of government that have issued the bonds.
The program demonstrated that a central bank can control yields easily by increasing demand for the bonds in the secondary market, which as a result of the inverse relationship between yields and prices, drives down yields to the desired target.
It can target any maturity on the yield curve (1-year, 2-year, etc) depending on which rates it wants to control.
There is no question that a central bank can dominate the bond market if it chooses, which should put to rest all the claims that private bond investors can force higher yields on the debt issued by currency-issuing governments.
The following graph shows the impact of the RBA’s bond-buying program of its percentage holdings of Australian federal debt up until December 2021.
Since March 2020, the Australian government has issued an extra $A274,814,351,095 worth of Treasury bonds.
The RBA has purchased $A234,999,000,000 worth of those extra bonds.
So over the course of the pandemic to date, the RBA has purchased 85.5 per cent of all the extra debt issued by the Australian government.
At the onset of the pandemic the RBA held 2.3 per cent of all outstanding Federal treasury bonds.
By the end of December 2021, they held 31.8 per cent.
They have also purchased significant quantities of debt issued by the states and territories since the pandemic began.
The RBA will go broke myth
The impact will be that the Federal government is effectively having its deficits funded by itself and will be paying interest to the RBA, which will then be recycled back to the Treasury in the form of dividends – right pocket/left pocket governmental transfers.
In terms of the discussion today, the RBA noted in the document I linked to above:
In addition, investors can use the proceeds they receive from selling their assets to the central bank to purchase other assets. These portfolio adjustments by investors can affect the price of these other assets and the exchange rate.
So, while, initially, the bond-buying program represents an opportunity for the sellers to alter the mix of their wealth portfolio, it remains that the liquidity the RBA provides the sellers in return for the bond instrument can be used as a speculative fund to pursue other assets – financial or real (such as real estate).
It is impossible to estimate how much has gone in to fuel the ridiculous boom in housing over the last few years, but some of it probably has.
The problems this is now causing younger and lower-paid workers is a direct result of the government maintaining the fiction that it has to issue debt to the primary market in order to spend.
It doesn’t and given that, ultimately, the government just ends up buying its own debt, they could eliminate any negative consequences of the whole charade by abandoning the practice of debt issuance and just instructing the RBA to credit various non-government bank accounts as required to facilitate its spending program.
The crediting is already happening but it would be cleaner without the debt charade.
Now, make sure you understand that there is a difference between some private bond holder selling their bond holdings to the RBA and a commercial bank selling its holdings.
That is where the ABC article cited in the Introduction falls foul.
The journalist (David Taylor) who regularly Tweets sensational headlines that do not reflect the situation, started by claiming that the RBA was “engaging in a money-printing program, also known as quantitative easing”.
As above, if he had actually read the RBA notes on its program, he would realise there was no ‘printing’ going on.
So by using this sensationalist type of language (which is analytically incorrect anyway), the journalist is distorting the readers’ understandings from the outset.
Soon after we encounter the next error:
The process boosts the money supply, drives down interest rates and incentivises the commercial banks to increase their lending.
The program does not increase the capacity of the commercial banks to make loans. I will come back to that soon.
The intent of his ‘analysis’ is to work out who will have “to pay for this program” because according to his assessment:
Everything has a price eventually, it’s only a matter of time.
Portents of doom.
At least he realises that the way the RBA transacts is to “literally punch extra zeros on its computer terminals at its headquarters at Sydney’s Martin Place in order to create money”.
Computers are not printers.
The general point is that all government spending is executed in the same way.
One arm of government (Treasury and Finance) instructs its central bank (the other arm) to “punch” some numbers into computers to facilitate the desired transactions with the non-government sector.
It doesn’t matter whether the government is purchasing pencils for schools or buying its own debt held by banks, people, or itself.
The journalist tells his readers that QE:
It results in the commercial banks having fewer bonds on their books and more cash to lend out (cash received by the RBA) – and an incentive to do so since they’re only earning 0.01 per cent on it at the Reserve Bank.
This is the classic error that people make when they do not understand the accounting arrangements between the central bank and the supervised commercial banks.
I considered these issues in a series of blog posts 13 years ago – when people were starting to wonder what the impacts of the large central bank bond-buying programs would be.
They were scared that the so-called ‘money printing’ interventions from the various central banks early on in the GFC would be inflationary.
The reason they thought that is because they had either been taught that in economics programs at university or because they had been listening to politicians and their crony mainstream economists relentlessly pushing that message in the media.
This set of blog posts was designed back then to set the record straight.
1. Quantitative easing 101 (March 13, 2009).
2. Building bank reserves will not expand credit (December 13, 2009).
3. Building bank reserves is not inflationary (December 14, 2009).
4. Lending is capital – not reserve-constrained (April 5, 2010).
The ABC analysis article falls foul because it thinks bank lending is constrained by the reserves they have in the vault and that quantitative easing solves this shortage by providing those reserves.
So banks are conceived as being ‘desks’ where officials wait for cash to come in in the the form of deposits, which they loan out, profiting from the difference between deposit and loan rates.
But this is a completely incorrect depiction of how banks operate.
Bank lending is not ‘reserve constrained’.
Banks extend loans to any credit worthy customer they can find and then worry about their reserve positions afterwards.
Remember that Each commercial bank has to keep an account – a reserve account – with the central bank.
The role of bank reserves is to facilitate the clearing system for transactions that have cross-bank implications.
So if Bank A creates a loan which simultaneously creates a deposit in its books, the person can either draw down the deposit and spend the cash in a business that banks with Bank A or spend in a business that banks elsewhere, say, Bank B.
In the former case, there is no clearing issue. Bank A simply transfers the deposit funds from the customer to the business.
In the latter case, Bank B will call on Bank A to transfer the funds into the account of its business customer.
Those transfers are what the clearing house is about and there are millions of such transfers being done on a daily basis.
That is what bank reserves are for.
So Banks A and B have accounts at the central bank and the relevant entries are made in those accounts to satisfy the transaction noted above.
The banks never loan out reserves to commercial customers (borrowers).
They sometimes loan out excess reserves to each other to smooth out the clearing system.
If banks are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window.
They are reluctant to use the latter facility because it normally carries a penalty (higher interest cost).
The point is that building bank reserves will not increase the bank’s capacity to make loans.
Loans create deposits which generate reserves not the other way around.
The major institutional constraints on bank lending (other than a stream of credit worthy customers) are expressed in the capital adequacy requirements set by the Bank of International Settlements (BIS) which is the central bank to the central bankers.
They relate to asset quality and required capital that the banks must hold.
These requirements manifest in the lending rates that the banks charge customers.
But despite what is taught in mainstream courses in monetary economics, bank lending is never constrained by a lack of reserves.
Which is why MMT economists never considered QE to be an appropriate vehicle for increasing bank lending in order to stimulate the economy.
Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts.
Quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell.
It was always obvious that the reason the commercial banks were reluctant to originate loans during the GFC was because they were not convinced there were credit worthy customers on their doorstep.
Further, after years of lax assessment practices in relation to credit-worthiness, the banks tightened their rules once the GFC threatened their solvency.
The ABC article’s focus then shifts to whether the RBA will make a loss on its bond-buying program.
The comparison is made between the support rate the RBA pays on excess reserve balances held by the banks and the yield it gets from the other part of government for its bond holdings.
If the yields fall below the support rate, then apparently we should worry because “it’s conceivable that the Reserve Bank could start recording losses as a result of the narrowing in the spread between what it receives and what it pays”.
The journalist then claims:
The Reserve Bank, like any bank, is a business.
It is not a business like any bank.
It is part of government with an infinite capacity to “punch extra zeros on its computer terminals at its headquarters”.
No other bank has that capacity.
And a private bank is owned by shareholders who require it to have a profit motive or go broke.
The RBA is part of government and its mission is to serve the people of Australia by maintaining financial stability.
The fact that, in an accounting sense, it might have negative capital at some point in time, is irrelevant.
I discussed these ideas in these blog posts (many years ago):
1. The ECB cannot go broke – get over it (May 11, 2012).
2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).
3. The consolidated government – treasury and central bank (August 20, 2010).
Clearly not understanding central banking, the ABC journalist insists that if the RBA records negative capital:
… the government would have to use taxpayers’ funds to recapitalise the bank.
You, the taxpayer, would begin paying for the fallout of the RBA’s money-printing program.
Like those zeros that were punched in to computer terminals!
As a taxpayer, I would not be paying anything to the RBA to adjust some numbers in its balance sheet upwards.
I would know that the Treasurer would instruct the RBA to ‘punch’ some numbers in to satisfy the accounting relations.
End of story.
The logic of this article is so misleading that it becomes dangerous input to the public debate.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.