E is for Effort

Alan Kohler wrote his first piece for The New Daily. It’s a rather optimistic piece where he says thankfully we haven’t entered a long depression as many feared. Irrespective of labels and what you define 2020 as, it has demonstrated that currency issuing governments always have financial capacity to deal with a collapse in spending.

First, 2020 wasn’t the beginning of another Great (Long) Depression, as understandably feared in March.

Why not? Because after the GFC, monetary authorities (central banks) decided to do whatever it takes to combat recessions.

Central Banks (The Reserve Bank in Australia) have the powers to deal with monetary policy. That is interest rates. They choose a ‘target rate’ for banks to loan to each other. In the same way you have an account with a bank, that financial institute has an account at the central bank (these are called exchange settlement accounts [ES]). These accounts need to be positive at the end of each day. If a bank is short it will borrow from another bank with surplus reserves. This is the rate the central bank aims to set. Currently the offical rate is 0.1% in Australia. Though the actual rate is much lower because of the banks QE program (more on that below)

What is Quantitate Easing?

As described above financial institutes hold exchange settlement accounts with the Reserve Bank of Australia. I’ve describe detail of various operations here, here and here. The RBA not only is able to set the rate of interest banks loan to each other (Cash rate) it can also set the yield on any Government bond. It currently has a target of 0.1 percent on 3 year Australian Government Securities (bonds)

What does this mean? As treasury spends via fiscal policy it adds reserve to the system by marking up these exchange settlement accounts. It is then a choice to issue a bond. These are offered for various lengths 1, 3, 5 year etc…by The Australian Office of Financial Management. The RBA has purchasing these bonds on the secondary market. So the steps are

  1. Treasury spends by marking up accounts at the RBA
  2. AOFM issues bonds – in Australia they are called Australian Government Securities (AGS). Financial Institutes purchase these from currency in their ES Accounts
  3. This operation drains ES Accounts and adds them to securities accounts
  4. The RBA has then been buying AGS to lower their yields and ensure the target rate on a 3 year AGS is 0.1 percent. You can read about it here

It is important to note that when the RBA is purchasing bonds it is switching the asset portfolio. More reserves in ES Accounts as it purchases back AGS that have been issued by the AOFM and it now ‘owns’ bonds that were issued by treasury.

This is usually called ‘money printing’ however by definition all spending by treasury is ‘new’ money entering the financial system.

Treasury spends via appropriation bills and the central banks use a computer to mark up the relevant bank account. This process is the same irrespective of past fiscal positions. It’s ‘cost’ in terms of the real resources used is the same irrespective of the interest rates. 

Bond issuance (govt debt) is an after the fact operation. It switches currency in reserve accounts (that financial institutes hold with the reserve bank) to securities accounts (which earns interest).

There isn’t a need to issue debt. Ask yourself where financial institutes obtain currency to purchase bonds? 

Treasury departments hold public accounts with the central bank. These are purely there to record the transactions that take place. The balance in that account is irrelevant to the governments ability to spend.

Seeing the powers that central banks have is to target an interest rate and NOT direct fiscal policy, there is very little they can do to deal with collapses in spending. The mainstream parade that interest rate movements will encourage or discourage spending. That is ridiculous. The manipulation of a rate banks loan to each other or a yield on a bond in no way encourages or discourages investment. The power lies with fiscal policy and that is held by treasury.

So, massive fiscal stimulus (which should really be called compensation) followed massive monetary stimulus from central banks – that is, money printing and rate cuts to zero and below.

It is true treasury engaged in spending to a level most of us haven’t seen before. None of this was financed by central bank operations. None. Bond issuance intrinsically has to work after the fact the issuer has spent. The fact interest rates are 0 or the RBA is purchasing bonds via QE program is irrelevant in treasury’s ability to spend.

Businesses are getting ready to catch that money and transfer it to their own bank accounts: Private sector job vacancies in Australia rose 24.2 per cent between August and November to a record high of 228,800.

That’s only a quarter of the 942,100 people still unemployed – but even in good times there are usually three unemployed people for every vacancy.

Obviously you are going to have a large increase in job vacancies when you emerge from a lockdown. That figure isn’t telling us much. It’s just a big number. The reality is there are still millions of under and unemployed. This is a policy setting by the government of the day. The Australian Government as a monopolist of The Australian dollar can always purchase idle labour. It chooses the unemployment rate.

The savings ratio is the inverse of consumption expenditure. Obviously when the lockdown happened people couldn’t spend and that caused the unemployment in the tourism, hospitality, arts sectors etc…It doesn’t tell us much more than that.

Meanwhile, the Reserve Bank is still pumping cash into the system.

In December it bought $20 billion worth of government bonds, bringing the total bought in 2020 to more than $100 billion, using freshly created money. That’s about half what the government actually issued.

Central banks pumping money into the system is, as descried above, switching currency in accounts at the Reserve Bank of Australia. It’s a smokescreen. QE has had The RBA purchasing bonds that are issued by the AOFM. Now treasury ‘owes’ money to the RBA. Yet within the mainstream media there is no acknowledgment that all spending has to originate from treasury as it marks up an account at the central bank. That is what the banks use to then purchase bonds!

Australia is only half pregnant with MMT because the RBA governor Philip Lowe insists that there is no such thing as a free lunch. Meanwhile governments elsewhere are munching on cost-free cash for lunch.

This is one of those myths that gets paraded around to invoke a fear of inflation. If we keep spending and if we continue to ‘fund’ treasury, eventually we will impoverish future generations and there will be inflation.

News flash: We have literally seen the Australian Government spend billions of dollars from nothing – we have seen the RBA engage in bond buybacks (QE) to expand the balance sheets of the banks and we had deflation.

Kohler gets that correct

Maybe the bill will be presented later in the form of inflation, as Dr Lowe confidently predicts, maybe not. But central banks have been printing money for 10 years so far and inflation hasn’t stirred.

I don’t describe it as ‘printing money’ but his comment that what central banks told us, that inflation will stir as a result, is spot on.


The policy prescriptions that you can advocate are thus different by viewing government spending through the lens that issuers spend first and tax and issue bonds after the fact.

The policy positions we need to wind down support measures (unemployment benefits) are shown to be purely spiteful. They ignore that governments choose the unemployment rate and can always purchase idle labour. We thus force people into poverty and punish them as a result of failed government policy to ensure enough jobs.

The positions taken by the mainstream economics that we should ‘spend now because rates are low’ are wrong too. Watch as they begin to attack government spending again at the first chance they can. We should spend as much as is politically desired on public infrastructure and full employment. Removing the lens that taxes fund our expenditure (rather than government spending funding our ability to pay tax) and ending the nonsense that states ‘bond issuance (government debt) ‘funds’ the government’ allows us to have better, more truthful discourse on the public services we should be providing.

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