Banking Royal Commission

COVID-19: Is a mountain of public debt for JobKeeper necessary?

Almost every day the news is full of stories about the explosion of public debt as the Federal Government responds to the impact of the COVID-19 pandemic with billions of dollars of JobKeeper payments, higher JobSeeker payments and fistfuls of special grants and spending programs designed to fill the economic pot holes resulting from large sections of the economy being rendered comatose by social distancing requirements or explicit lockdowns.

Surely all that money spent by the government must come from “somewhere” and surely the government must borrow it from the people of “somewhere” in order to spend it.

At least that is the logic. But is it true?

No and Yes.

There are no lazy billions lying around “somewhere” waiting to be borrowed by the government but the structure / logic of our privatised public monetary system means that we must pretend that there is.

A privatised public monetary system depends on the fiction that the money the government spends comes from “somewhere” even when something like the COVID-19 pandemic makes maintaining the fiction nearly impossible because only an idiot could believe that there is a “somewhere” and a “someone” who has hundreds of billions of dollars lying around.

So while the correct answer is No, until we are prepared to face up to the anti-democratic farce that is a privatised public monetary system the answer is Yes. The government must borrow all of those hundreds of billions it is spending from the very nice “someones” who live in “somewhere”.

So what are the mechanics of the myth

Under a privatised public monetary system like the one we have in Australia a government who wishes to spend more than it has in its deposit account at the RBA is required to proceed as follows. The RBA Governor has made this very clear in recent speeches in case you were wondering RBA Watch: The Lowe down on Magic Money.

Step 1 The Government sells an IOU (bond) to a bank

Say Josh Frydenberg wants to send the 3.5 million people receiving JobKeeper their fortnightly $1,500 cheque and the balance in the government account at the RBA is zero. A total amount of $5.25 billion is required for that single payment. He will ask the AOFM (Australian Office of Financial Management) to go get him some money from “someone in somewhere”.

The AOFM will print up a bit of paper called a bond. That bit of paper promises whoever buys it that the government will pay the holder the amount borrowed and some interest on top. Some jolly bankers (called primary dealers) compete in an auction to buy the bond and whoever offers the AOFM the most wins the bond. To pay for the bond the banker asks the RBA to transfer the price they agreed to pay from the bank’s deposit account (ES account) at the RBA to the government’s deposit account at the RBA.

The RBA will make the following accounting entries.

DR Bank deposit account at RBA $5.25 billion

CR Government deposit account at the RBA $5.25 billion

However, there is a problem as changes to the balance of the bank’s deposit account might affect the “cash rate” which the RBA manipulates and reviews each month. To avoid the bond purchase by the bank undermining the RBA’s manipulations of the cash rate, the RBA may want the balance of the bank’s deposit account to be restored to where it was before it bought the $5.25 billion bond from the government.

Photo by Simon Migaj on Pexels.com

So what does the RBA do?

It buys (for the most part they are called repurchase agreements – repos) things (e.g. bonds) from the bank and pays for them by creating money out of thin air. Effectively, the RBA has created money out of thin air and given it to the bank that has just bought the bond from the AOFM.

The corresponding RBA accounting entries look like this.

DR Assets (Bonds purchased by RBA) $5.25 billion

CR Bank deposit account at the RBA $5.25 billion

Why perform this complicated farce when the AOFM could have just sold the $5.25 billion bond directly to the RBA, and because the RBA is owned by the public it could have been told that no interest would be paid on the bond? In other words the government could raise the $5.25 billion directly from the RBA without incurring a debt that requires the payment of interest.

The reason is simple. In a privatised public monetary system it is critical that the public believe that the government MUST borrow money from private banks and pay interest to do so. They must not realise there is an alternative.

It is quite simply a scam and it is a disgrace that public servants at the RBA, AOFM and Treasury and our elected politicians are parties to this scam and fail to explain the simple alternatives that are available.

What happens when the government’s JobKeeper cheques are received by the public

When the cheques/electronic transfers from Josh Frydenberg are received by the public (JobKeeper recipients) they are deposited into their banks accounts. Each cheque results in an increase in the bank’s deposit account at the RBA and adecrease in the government’s deposit account at the RBA.

When all of the Job Keeper cheques have been banked the result is that the government deposit account at the RBA is down $5.25 billion and the deposit accounts of the banks have risen (in total) by $5.25 billion.

As this rise in the balances of the bank’s deposit accounts at the RBA might affect the RBA’s manipulation of the cash rate the RBA might wish to lower those balances and to do this it will sell bonds to the banks and deduct the sale price from the bank’s deposit accounts.

Net result

The net result of this process is that the government’s deposit account is back where it started (it went up $5.25 billion when the bond was sold and then down $5.25 billion when the JobKeeper cheques were deposited by their recipients at their bank).

And the bank’s RBA deposit balance account is back where it started (it went down $5.25 billion when it bought the bond and then back up when the RBA bought the bond with money out of thin air and then up higher when the JobKeeper cheques were deposited and then down again when the RBA sold the bank bonds and deducted the purchase price from the Bank’s RBA deposit account.

The net result is that the bank is left owning a bond (an IOU from the government) that pays interest and accordingly is an almost risk free interest bearing asset.

The government has now created a $5.25 billion debt that pays interest when it could have just sold the bond directly to the RBA and paid no interest.

The process is repeated

The process described above is repeated every two weeks in order to pay 3.5 million Australians $1,500.00 each. The total cost over 6 months (or 12 fortnights) is $63 billion.

$63 billion dollars worth of interest bearing debt that was created for NO other purpose than to maintain the fiction that the government HAS to borrow the money involved from “somewhere”.

So why not just sell the bonds directly to the RBA?

This would seem to be a simple solution.

Why not just sell $5.25 billion worth of bonds, that pay no interest, directly to the RBA every fortnight and have the RBA credit the government’s deposit account at the RBA. Then the government could just write the necessary JobKeeper cheques.

The reason this cannot be done is because to do so would be inconsistent with a privatised public monetary system where the banks have been given the power to create over 95% of the money supply when they make loans.

If the RBA started creating $5.25 billion every fortnight (just for JobKeeper) they would be effectively muscling in on the money creation turf that the private banks believe is their own.

The fundamental reason why the simple and obvious solution of selling bonds directly to the RBA is not permitted is nothing more than to preserve the privilege of the private banks to effectively create public money when they make loans.

Not that the banks admit that is what they doing because they understand that the public might start to cotton on to the outrage involved in allowing bonus hunting, corrupt and crooked bankers to exercise such enormous power. The recent Banking Royal Commission revelations made it very clear why we should not trust the banks with the exercise of that power.

Photo by Andrea Piacquadio on Pexels.com

Why the privatisation of public money model cannot tolerate the obvious solution

The following illustrates the problem for the privatisation of public money model if the bonds to pay for JobKeeper were sold direct (and interest free) to the RBA.

DR Assets (Interest free Bond purchased by RBA) $5.25 billion

CR Government deposit account at the RBA $5.25 billion

The government would send JobKeeper cheques / electronic transfers to the recipients who would then deposit them in their bank accounts. This would result in the balance of the government deposit account falling and the Bank deposit accounts at the RBA rising.

DR Bank deposit account at RBA $5.25 billion

CR Government deposit account at the RBA $5.25 billion

After this process has been completed every fortnight for 6 months the following are the key entries in the RBA balance sheet.

Liabilities

Bank deposit accounts at RBA $63 billion

Government deposit account at RBA $0 billion

Assets

Assets (Interest free Bond purchased by RBA) $63 billion

The RBA is unable to manipulate the cash rate, by buying bonds to push down the balances of the Bank deposit accounts, because the banks have no bonds to sell. All of the JobKeeper payments made by the government were funded by selling interest free bonds directly to the RBA. No interest bearing bonds were sold to the private banks.

The growing bank deposit accounts at the RBA are an allocation of capital from the perspective of the bankers and they simply hate the idea of having capital tied up in an RBA deposit account. Especially if no interest is paid by the RBA on the balances (which is exactly what should be the case). Unbelievably the RBA is currently paying the banks interest on their 100% risk free RBA deposit account balances but such absurdities are necessary to keep the broken privatisation model from imploding.

Even worse, from the perspective of the private banks, the balance sheet of the RBA is now growing and some bright spark / troublemaker (i.e. the Glass Pyramid) might get the idea of allowing non-banks and the general public to open and operate completely risk free deposit accounts at the RBA.

The banks simply shudder at the thought of all their non bank finance sector competitors and customers having the right to open and operate a deposit account at the RBA.

Just think of all those cheques and transfers to JobKeeper recipients over 6 months going directly from the government’s deposit account at the RBA to the MyRBA deposit accounts of 3.5 million Australians.

DR 3.5 million Australians deposit accounts at RBA $63 billion

CR Government deposit account at the RBA $63 billion

The implications are enough to make a private banker have a big cry.

  • No interest bearing bonds sold to bankers by the government. After all a bond is effectively just a privatisation of part of the central bank balance sheet with an interest charge attached. A royal scam.
  • $63 billion in zero interest bonds held by the RBA
  • 3.5 million Australians with $63 billion in deposits at the RBA
  • No transaction data to mine as those 3.5 million Australian spend their JobKeeper payments

But the really important points are as follows:

  1. The government does NOT need to borrow the money for JobKeeper payments from someone somewhere.
  2. The government does NOT need to pay interest on the money it requires to pay JobKeeper payments
  3. The fiction/myth that the government has to borrow the money from someone and pay interest on those borrowings has no other function than to protect the much abused and rorted money creation privileges enjoyed by the private banks.
  4. There is a simple and obvious solution but it would expose the rort that is the private bank control over public money creation. The massive power exercised by bankers when they decide who is “credit worthy” enough to obtain access to bank credit / new money.
  5. The one thing the private banks fear most is losing their monopoly over non government deposit accounts at the RBA if the general public and non banks are permitted to operate deposit accounts at the RBA.
  6. The private banks will run the mother of all scare campaigns to protect their lurks and perks and privileges with respect to the creation of public money.

Permitting non banks and the general public to open and operate MyRBA deposit accounts at the RBA is the foundation stone of fundamental and long over due monetary reform.

The COVID-19 pandemic and the extraordinary responses required by government is simply exposing how archaic, corrupt and broken the current privatised public monetary model is.

It is simply not fit for purpose and must be fixed.

Necessity is the mother of invention and we should let her get to work.

6 replies »

  1. just because an iou or bond pays no interest does not mean that there is no interest rate risk. there is still the future value of the principal repayment. 0% interest may be worthwhile in a deflationary environment but clearly inadequate with any element of inflation. the level at which people are willing to buy a bond or assume the interest risk (even if no interest) depends on their outlook for inflation.amongst other things. whilst true that the government could do as you describe this would entail the government assuming this risk and if the market thought this inappropriate (or the amount the government does) we would likely see a decline in Australian dollar

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  2. You have missed a critical point in how you describe the system as operating. Most people who buy bonds hedge with bond futures. There must be a buyer for those bond futures for this to happen. The buyer of futures is taking the risk of rising interest rates. If there was no buyer of futures interest rates would rise and it would be more expensive to borrow money.
    So there is a transfer of risk either to the unhedged buyer or to the futures market.

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    • A discussion of bond futures and the trading in those futures (and the risk of interest rate movements) was not really relevant to the post which was about the myths and fables involved in convincing the public that there is no alternative to the government selling interest bearing bonds to the private sector.

      As was noted in the post “..a bond is effectively just a privatisation of part of the central bank balance sheet with an interest charge attached. ”

      I have no doubt that there is a very active market in buying and selling exposure to interest rate movements just as there is a very active market in buying and selling exposure to foreign exchange rate movements.

      If the government’s JobKeeper payments simply remained on the RBA balance sheet as deposits that pay no interest and bonds that pay no interest there would be no interest rate risk to trade.

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      • just because an iou or bond pays no interest does not mean that there is no interest rate risk. there is still the future value of the principal repayment. 0% interest may be worthwhile in a deflationary environment but clearly inadequate with any element of inflation. the level at which people are willing to buy a bond or assume the interest risk (even if no interest) depends on their outlook for inflation.amongst other things. whilst true that the government could do as you describe this would entail the government assuming this risk and if the market thought this inappropriate (or the amount the government does) we would likely see a decline in Australian dollar

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        • You are describing a situation where the RBA having bought a bond, that pays zero percentage interest, at face value, directly from the AOFM (and credited the government deposit account accordingly) might (and I say might because the bonds may not have a maturity date…they may be redeemable purely at the discretion of the AOFM) at some future point receive payment of the face value from the AOFM (i.e. bond redemption).

          In that event the RBA entries to its balance sheet would simply be

          DR Government deposit (face value of the bond)

          CR Government bonds (held by the RBA) (face value of the bond)

          And your concern is that the “market” might get upset if there has been inflation but the government only pays the face value of the bond to redeem it?

          I don’t understand what the risk is or what the “market” will be upset about?

          Note: I fully anticipate they will be still be upset and moaning for decades to come about how private banks lost their money printing powers. 🙂

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