The recent post “COVID-19: Who are the real “Money Printers” discussed how the really serious “money printing” over the last 20 years has been conducted by the private banks as they created hundreds of billions of dollars of bank credit and handed it over to their “mates”, the “insiders” or “credit worthy” who then punted on the prices of assets inflated by a steady stream of bank money creation /printing and courtesy of some generous capital gains tax policies made out like bandits.
This post discusses the money “creation” options once MyRBA commences and the Reserve Bank of Australia “RBA” allows the general public and non-banks to open and operate deposit accounts at the RBA and the private banks lose their “money printing” privileges.
Money creation in Australia over the last 20 years
In the post COVID-19: Who are the real “Money Printers” the following key details of money creation / printing in Australia over the last 20 years were discussed by reference to a comparison of “Broad Money” components recorded on the balance sheet of the RBA and the balance sheets of the mostly private banks.
|Year||Money creator / printer||Broad Money ($)||Increase per year (approx)|
|Private Banks||$518 billion|
|Total Broad Money||$546 billion|
|2020||RBA||$167 billion||$7 billion|
|Private Banks||$2160 billion||$82 billion|
|Total Broad Money||$2327 billion||$89 billion|
As noted in the post, of the total of $2160 billion dollars worth of Broad Money recorded in the private bank balance sheets in 2020 about $1.4 trillion was created by the banks while about $740 billion could be attributed to money creation by the public sector.
On average that boils down to about $70 billion dollars per year over 20 years printed by the banks and about $19 billion (7 + 12) per year by the government.
And people wonder why the banks and their economic minion army are so critical of government money creation / printing. They understand public sector money creation is competition even if the vast majority of public sector money creation is quickly converted into interest accruing assets for rich folk. They are not going to be happy until they have complete control of the money creation / printing process.
An expanded RBA balance sheet is the stuff of banker nightmares.
So what happens when the banks lose their money printing privileges?
Once the money printing habits of the private banks are exposed and understood, the implications of removing that privilege when MyRBA is introduced, as was discussed in Bank Watch: Essential Bootcamp equipment, requires some explanation as we can be completely certain that the supporters of a privatised public money system will howl long and hard about how the end of the world is nigh if the private banks are not running the money printing show.
What does money creation mean when MyRBA is introduced
As the above analysis of the measure of Broad Money indicates, money creation is little more than balance sheet expansions. After MyRBA is introduced money creation will be limited to an expansion of the RBA balance sheet. The private banks will be unable to expand their balance sheet by creating bank credit from thin air (even if the process is technically limited by capital adequacy requirements etc).
The $2 trillion dollar big bang!
The first thing to keep in mind is that the moment MyRBA is introduced the RBA balance sheet will immediately expand by $2160 billion as the CBI accounts for each bank are established and entries are made to fully reserve all the deposits on the Private Bank balance sheets. So that is a huge amount of money printing on day one. But we don’t need to panic as the amount of “money” available to bank customers has not increased by one cent.
The amounts created in the CBI accounts merely “fully reserve” the amounts in their bank accounts. Accordingly, if they choose to open a MyRBA account and transfer some of their bank account balances to the MyRBA account, their bank account balances is reduced and so is the CBI account balance of their bank at the RBA.
It is amazing to think that over $2 trillion dollars can be created out of “thin air” on the RBA balance sheet and it will have no impact on inflation or the cost of potatoes.
What are the options for expanding the RBA balance sheet when the MyRBA is introduced?
After MyRBA accounts are introduced “MyRBA: Ending the bank monopoly of the RBA” and the banks have lost their money “printing” privileges the only way “public money” can be created is by an expansion of the RBA balance sheet. Naturally other types of private and foreign money can still be created, by those responsible for those alternative monetary systems, as an abundance of monetary choice is important to keep everyone on their toes.
So how can the RBA balance sheet expand? The only way to expand the RBA balance sheet is by making matching accounting entries. A credit to record the creation of the central bank liability that is the new “public money” and a corresponding debit entry to balance the “money” liability. The debit entry can be anything that sounds asset like including perhaps “Australian Money on Issue”
The accounting entry is the easy bit. The interesting bit is how the power to create the accounting entries that expand the balance sheet should be exercised.
It is generally this issue that causes mass hysteria from the banker pet economists and their bugle blowers in the real estate journals as they roll out the familiar tropes – Weimar, Zimbabwe and a wheel barrow full of paper to buy a potato.
Oddly enough these shrieking doomsters suffer complete amnesia when it comes to the unproductive hyper inflation in asset prices that their banking buddies cranked out around the globe over the last 40 years as the banker’s printing presses ran too hot, blew smoke and eventually went into meltdown during the GFC and have been on zero interest rate policy life support ever since.
So how should the power to create accounting entries and expand the RBA balance sheet be exercised?
With prudence and care and with regard to inflation. The actual size of the RBA balance sheet is not important. The important issue is not some Milton Friedman style quantity of money obsession but simply that there is “enough” money to keep the value of money reasonably stable. How much is “enough” is likely to change over time.
What is the important thing is that the value of public money remains fairly stable because that is what the public generally prefer. It is only bankers who like inflation because the existence of inflation increases the attraction of using their debt peddler product lines and helps conceal their wealth extraction / concentration model. Borrowers are attracted to borrowing when the value of the dollars required to repay their loans are constantly reducing. It is no surprise that the RBA currently has a inflation target of about 2% as that is what suits their preferred stakeholders, the debt peddler banks.
Keep in mind that NO interest will be paid on the balances of MyRBA accounts or the CBI accounts of the private banks or on the banks own MyRBA accounts (currently known as ES accounts) and the only way people can earn a return is by investing (putting at risk) some of their MyRBA or fully reserved bank account balances. They do this by transferring some of their risk free MyRBA deposits to someone else who reckons they can generate a return. That means those trillions of dollars of central bank liabilities are not growing as a result of interest being paid by the RBA on the MyRBA account balances.
In addition there will be none of the large fluctuations we see in the “money supply” when bankers go mad and sprinkle “whale loans” like confetti or take fright and call in their existing loans, cease writing new loans or loans go bad and as a result bank assets vanish. When MyRBA is introduced bad lending decisions by lenders will have no effect on the size of the RBA balance sheet. They may be unable to secure the return of the central bank liabilities they transferred to the borrowers when they made the loan but those liabilities will still exist on the RBA balance sheet.
With no interest being paid on several trillion dollars of central bank liabilities and no rapid fluctuations in the money supply as a result of banker hot flushes or cold panics, the expansion of the RBA balance sheet is likely to become a dull boring affair with the RBA and a bunch of other cardigan wearers at the ABS offering advice to the government as to the need to expand or contract the RBA balance sheet to ensure the value of public money remains reasonably stable.
It is likely that the usual advice will be an expansion that is consistent with the economy operating at close to full capacity. While no single metric will provide a mechanic answer the following may be taken into account:
- Population growth
- The level of unemployment (spare labour capacity)
- Capital utilisation
- Changes in the propensity of people to save, invest or consume.
This is not going to be a three decimal place exercise in precision. Adjustments can be made on a regular basis to reflect the result of earlier adjustments. Minor tweaks are likely to be about all we can expect.
So who gets the expanded RBA balance sheet liabilities?
There are a couple of options.
It is likely that any tweaks or expansions recommended to the government will not be substantial. Especially if the economy is already close to full employment or operating at close to capacity. It is quite possible that any balance sheet expansion tweaks will be minor. It is even possible that there may be a recommendation that the RBA balance sheet be reduced if there is increased propensity on the part of the part of the public to invest or consume rather than save and that increases demand beyond the capacity of the labour force or other inputs.
So you can forget your dreams of magic money trees, helicopter drops and spend-a-thon Santa Claus governments. It is more likely that any RBA balance sheet adjustments will be relatively small and quite unexciting.
Given that Broad Money expanded by about $89 billion dollars per year over the last 20 years and a large chunk of that was squirted at the great Australian housing bubble Ponzi scheme it may be that annual RBA balance sheet adjustments may be relatively small, perhaps $20-30 billion or less. Particularly if unemployment is low and most people are busy enough.
On the assumption that there is a recommendation for a modest expansion of the RBA balance sheet the government might:
- Engaging in some project(s) – pork barrels should be avoided.
- Increase some services – for those that need them not fat cats
- Increase some forms of transfer payments – for the genuinely needy
- Reduce taxes – especially on the lowest income earners
Perhaps best of all, because this will silence those who do not believe government ever does anything useful, the government might just make an appropriate sized deposit to every MyRBA account of Australian citizens and let them decide whether to save, spend or invest the deposit.
Allowing every member of the public the opportunity to control their slice of an expansion of the RBA balance sheet may be the fairest approach of all. Assuming a $20-30 billion dollar balance sheet expansion that would only amount to a cash splash of $800 – $1200 each year for each Australian (approx 25 million).
After all, the government will still have loads of power to adjust the size and policy stance of government via its taxation and spending policies (the Federal Budget prior to COVID-19 was approx $420 billion) even if it decides to run a “balanced” budget.
There is a good argument that if a public utility and asset like the RBA balance sheet is to be expanded every citizen should be free to decide how they would like to deploy their share of that expansion.
A more democratic Reserve Bank balance sheet where everyone has their own MyRBA deposit accounts is streets ahead of the situation now where a privileged group of private companies have a monopoly on operating deposit accounts at the public owned central bank.