MyRBA

MyRBA: Ponzi-free loans and investment

Some readers of the Glass Pyramid are very excited by the potential of MyRBA to introduce a genuinely democratic Reserve Bank of Australia (RBA) balance sheet but are concerned about the implications of this important reform for borrowing, lending and investment.

Hopefully, this post will provide the detail that will allow them to Netflix and chill and count the sleeps until MyRBA arrives.

For a fast introduction to MyRBA see “MyRBA: The Quick Guide and helpful links

As was discussed in “Money Creation after MyRBA” the introduction of MyRBA will result in an expansion of the RBA balance sheet from about $280 billion to about $2475 billion with about $2200 billion of that in the new CBI accounts created to fully reserve the private bank deposits (see MyRBA: What is the new CBI Account? for more detail on the CBI account concept).

Accordingly, on the morning that MyRBA is introduced the RBA balance might look a bit like this (having regard to the balance sheet of the RBA as at 12 August 2020)

Liabilities$ millionAssets$ million
Capital and RBA reserve fund14,000Gold and FX$64,000
Australian notes on issue95,000Aussie dollar investments$210,000
Bank MyRBA accounts (old ES accounts)65,000Australian Public Money2,200,000
Bank CBI accounts (total)2,200,000
Deposits (i.e. govt deposits)80,000Other assets2,000
Other liabilities$22,000
Total2,476,000Total2,476,000
Table 1 – RBA balance sheet the minute before MyRBA transactions commence.

Naturally when MyRBA is introduced early adopters will busily move some of their bank deposit balances into their brand spanking new MyRBA account. For the purpose of the exercise let’s assume that over the first few weeks about 10% ($220 billion) of bank deposits are moved into new MyRBA accounts at the RBA. The RBA accounting entries to reflect this movement from the CBI accounts to the MyRBA accounts will be as follows:

Debit Bank CBI accounts$220,000
Credit MyRBA accounts of the general public and non-banks$220,000
Entries to record early adopters moving deposits into new MyRBA accounts

However this is not the only thing happening over those first few weeks of MyRBA. Because no interest is paid by the RBA, on the balances of MyRBA accounts and the Bank CBI accounts, plenty of folk will be taking action to ensure they earn a return on their money. They will not be short of options as there will be plenty of smart folk with smart ideas eager to attract some of those risk free but zero interest deposits by promising the current owners of them a return.

In fact in the lead up to the introduction of MyRBA the newspapers and airwaves will be full of people offering low risk low returns options right through to dazzling high risk high returns for the steely nerved.

Photo by Pixabay on Pexels.com

For the purposes of this exercise let’s assume that the remaining $1,980 billion in the CBI account at the RBA is “actioned” by its current owners so that in the weeks following the introduction of MyRBA it is allocated as follows

Investment typeRisk / return$ million
Left in account (Fully Reserved) at bank (CBI account)Zero risk / Zero return100,000
Bonds funding residential first mortgages advanced to first home buyers (50% issued by banks and 50% other home lenders)Low risk / modest returns600,000
Bonds funding loans to businesses secured by fixed assets (50% issued by banks and 50% other business lenders)Moderate risk / moderate returns350,000
Investment in Peer to Peer loansModerate risk / moderate returns100,000
Bonds funding loans to start up secured by hopes and dreams (50% issued by banks and 50% other startup lenders)High risk / high returns400,000
Purchase of shares in private or public companiesVaried400,000
Purchase of foreign exchangeVaried10,000
Purchase of other private money (cyber currencies)Varied10,000
Purchase of goldVaried10,000
Total1,980,000
Table 2- How bank deposit account owners decide to action their deposits when MyRBA is introduced

So what will the RBA balance sheet look like a few weeks after most of the remaining balances of the CBI accounts is “actioned”. To assist the reader understand what is happening a break down is provided of the RBA balance sheet after the “actioning”.

To keep it simple we will assume that the recipients of the “actioned” balances requested that ALL the transfers be made to their MyRBA account. In practice it is likely that many (who are worried about the RBA snooping on their transaction data) may prefer the transfers be to their now fully reserved but zero interest bank accounts (where a bonus hunting bank manager can snoop on their transaction data).

Liabilities$ millionAssets$ million
Capital and RBA reserve fund14,000Gold and FX$64,000
Australian notes on issue95,000Aussie dollar investments$210,000
Bank MyRBA accounts (old ES accounts) (65 + 675)740,000Australian Public Money2,200,000
Bank CBI accounts100,000
MyRBA accounts
MyRBA individuals220,000
MyRBA (non bank home lenders)300,000
MyRBA (non bank business lenders)175,000
MyRBA (P2P lenders)100,000
MyRBA (non bank start up lenders)200,000
MyRBA (companies who sold shares)400,000
MyRBA (people who sold FX)10,000
MyRBA (people who sold Cybercurrencies)10,000
MyRBA (people who sold gold etc)10,000
Deposits (i.e. govt deposits)80,000Other assets2,000
Other liabilities$22,000
Total2,476,000Total2,476,000
Table 3- RBA balance sheet a few weeks after MyRBA is introduced

Keep in mind that Table 3 is illustrative only as in practice the recipients of the ‘actioned’ deposits will be moving quickly to put those funds to work so as to earn the returns they have contracted or promised to deliver to those who have transferred the funds to them. When they do that their MyRBA balance will fall and the MyRBA accounts of those who received a loan or an investment will rise.

It is also important to note that in the above example the MyRBA balances of the banks have risen from $65 billion to $740 billion as they attracted 50% of the funds allocated to home lending, business lending and start up lending.

Photo by Pixabay on Pexels.com

THE WONDERS OF COMPETITION

The private banks have NOTHING to fear from MyRBA, provided they understand that they now have to compete on a level footing with a whole host of other folk eagerly trying to attract investment funds from those with balances in their risk free (but zero interest) accounts that are higher than they require.

This is one of the key attractions of MyRBA. Rather than give, as the current system does, the private banks a protected and heavily subsidised role at the centre of the public monetary system and miserably watch them abuse their privileges as they lazily inflate asset prices bubbles and take advantage of their customers, MyRBA kicks the Zimmer Frame out from under them and forces them to sweat it out and earn a 6-pack competing with all the other keen kids.

MONEY CREATION AND MyRBA

Because the RBA will pay NO interest on either the MyRBA accounts or the CBI accounts of the private banks, because those balances are completely risk free and it makes no sense to provide a return when no risk is taken a healthy tension is created, owners of MyRBA deposit accounts or fully reserved private bank accounts (protected by the CBI accounts) will only maintain balances that are sufficient to meet their need for risk free savings.

If they want to earn a return they MUST accept risk and transfer their funds to someone who has persuaded them that they can be trusted to deliver the best possible return for the amount of risk (but never zero risk) that the person is willing to take.

So how can the government increase the supply of funds available for investment but do so in way that is equitable and fair to all members of the general public and allows as much competition as possible for those funds?

Easy

By expanding the balance sheet of the Reserve Bank in a fair an equitable manner having regard to advice regarding what expansion is consistent with stability of the public money (i.e neither inflation nor deflation) and the spare capacity and resources available in the economy.

One possible way of expanding the RBA balance sheet equitably is the way discussed in Money Creation after MyRBA where an amount is deposited into the MyRBA account of every member of the general public.

Having regard to average expansion of Broad Money over the last 20 years by about $90 billion dollars per year and that the banks will lose their capacity to expand Broad Money completely an expansion of the Reserve Bank balance sheet by $20-$30 billion per year was suggested as a conservative starting point. This would amount to a deposit of approximately $800-$1200 per person for 25 million people.

The amounts above are merely illustrative as what will determine the amount of the annual expansion is the spare resources (including labour) and the objective of maintaining stability in the value of the money. An alternative approach which might appeal to those who like government making decisions, would be to make no deposits to individuals and instead have the government run a budget deficit of $20-30 billion.

The important point is that allowing the general public to open and operate MyRBA accounts at the RBA, and expanding the RBA balance sheet in a fair and equitable manner results in a trickle up economy where investment managers, scheme promoters, lenders, companies and other investment opportunities of every shape and size are forced to compete to attract that portion of the RBA balance sheet expansion that exceeds the general public’s desire for risk free but zero interest MyRBA balances.

Interest rates: How much will borrowers pay?

That will depend on the demand for investment funds and the willingness of the public to supply those funds by transfers from their risk free but zero deposit accounts. The growth in the supply of funds will depend on the rate of expansion of the RBA balance sheet and that in turn will depend on the amount of spare resources in the economy and maintaining price stability.

So interest rates are likely to vary depending on the savings preferences of the general public and the extent to which there is a demand for funds for investment. It is likely that the balance sheet of the RBA will be allowed to expand as much as the objective of price stability permits as that is likely to increase economic activity and thus the full employment of resources such as labour. A larger balance sheet is likely to result in generally lower interest rates.

SUMMARY

It is difficult to imagine an approach to a monetary system that could match MyRBA as a powerful yet productive and profoundly democratic driver of economic activity.

Compared to the corrupt, broken, asset price pumping private bank dominated and impossible to regulate model we currently endure there is no contest.

We need a democratic RBA balance sheet that engages all Australians and the MyRBA proposal will deliver exactly that.

Categories: MyRBA

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