Flat White

Our monetary mandarins must be reading the SpecOz

20 May 2021

4:43 PM

20 May 2021

4:43 PM

In March of this year, I wrote in this august publication: 

For the economic benefit of the nation, let’s end this charade and bring the RBA back under the director control of the Treasurer. Josh Frydenberg may not be the sharpest knife in the draw, but unlike RBA Governor Phil Lowe, he is at least subject to election every three years or so. 

Well, it appears that the leadership of the Treasury and RBA are Spectator Australia subscribers.  As reported in the AFR today: 

Former RBA assistant governor Malcolm Edey belled the cat this week when he said in Canberra the RBA was indirectly financing the government by buying bonds in the secondary market and lowering the cost of government borrowing. 

Belled the cat.  More like stated the bleeding obvious. 

That’s right.  The RBA is printing money to buy government bonds to keep the cost of government debt low so that the government can pretend there is no problem while the cost of debt is low. 

Perhaps this should have been obvious when Philip Lowe was appointed RBA Governor.  Rumour has that the choice came down to John Responsible and Phil Lowe and the government went with Lowe.  No way in this universe would a Liberal government appoint someone Responsible to lead the RBA. 

But for those who prefer pictures, this is from the RBA’s website.  Data to 29 April 2021: 

That big grey-coloured area that is growing at the speed of the government’s debt is the RBA’s purchase of domestic bonds.  Government bonds.  Commonwealth, state and territory bonds.  All funded through the printing of money. Notice the increase in not just the balance sheet but the size of bond holdings from 2018-2019 to today.  How’s that for responsible economic management. 

The RBA will own about 30 per cent of Commonwealth government bonds and 15 per cent of state government bonds by September. It estimates its initial $100 billion bond-buying program reduced the 10-year bond yield by 30 basis points. 

The RBA will pretend they are not “monetising” the debt because they are buying the bonds on the secondary market.  As if that makes a difference.  But this charade, much like that if central bank independence, is nothing more than another subsidy to the banks who buy the bonds from the government because they know with near absolute certainty that the RBA will buy them from the banks at a profit. 

Voila.  Everyone is happy.  Except citizens and savers. 

Oh, and what does printing money do?  It creates inflation.  And who likes inflation?  The government because it gives them extra tax revenue.  Why?  Because income tax, company tax, capital gains tax, GST receipts all increase without increasing the rate. 

And who loses from inflation?  Everyone else. 

If anyone thinks that the RBA is independent, they really need to reassess.  Such people probably also think that the Liberal government are responsible financial managers. 

Never forget the words of Milton Friedman: 

The elementary truth is that the Great Depression was produced by government mismanagement. It was not produced by the failure of private enterprise.   

Can it get any worse?  Hell yes.  SloMo and JoFro can get re-elected. 

Stephen Spartacus blogs at Sparty’s Cast, where a version of this piece also appears.

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