An email to the RBA

There's no competing with you Iain.
Succinct & extraordinary.
I hope you get a reply.
Might be worth tweeting a pic of the content too btw.

Stone walled!!

My email to RBA info

Hi,
I was wondering about Govt Debt and if there was any relationship to the
money supply.
I was looking at the AOFM website and it says that Government Debt ie Bond
issues are merely borrowing existing Australian dollars to finance
Government deficits, then there would be no increase in the money supply
caused by Government deficit spending.
If however the issuing of Government Bonds is just a reserve drain ie just a
liability swap between cash held in reserve accounts and long term bonds and
the Government created new money by deficit spending then you would expect
to see an increase in the money supply.

Since 2008 the M3 money supply has increased by about $873 billion and the
Gross Govt debt has increased by around $400 billion
Are there statistics available to tease out that the increase in money
supply is caused by Government creating new money by deficit spending and
Not borrowing existing Australian dollars ?

Best Regards
Rod Merigan


Rod

Thank you for your email.

The following paper from the Bank of England is probably a useful resource for you
www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf.

One important point is that the most significant contributor to growth in the money supply is banks making new loans and consumers and businesses repaying existing borrowings. However, if banks purchase assets from the non-bank financial sector, they will add to the money supply by crediting the seller of the asset with bank deposits. Banks selling assets to the private non-financial sector has the opposite effect.

Regards

Paul

Paul Dekkers | Manager | Media & Communications
RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9833 | f: +61 2 9551 8033 | w: www.rba.gov.au

Paul,
Thanks for the reply.
I was already aware that Banks create new deposits by lending and that most of the increase in the money supply is new debt into the housing bubble.
That BoE paper puts the loanable funds theory you still find in economic textbooks and most economists still adhere to, quite out of date.

The Government as the currency issuer must be also increasing the money supply as they are increasing deposits by crediting reserves when they deficit spend.
On the RBA website it mentions that ES accounts are credited by Govt spending and debited when taxes are paid so deficit spending must be a net credit.
The excess reserves are then drained by bond sales so you guys can maintain the cash rate.
As I see it Bond sales a simply a liability swap from Govs liability on short term cash/reserves to longer term bonds as the govt can’t really borrow its own liabilities.

When you mentioned Banks purchasing/selling assets these would be financial assets like MBS, shares etc. Don’t those assets end up being counted in M3 ?
So any transactions there would net out and not show up in the increase of M3 , but newly created Govt bonds would.

Should I assume that the increase in Govt Bonds is counted in the M3 money supply and just take the Bonds on issue as the Govt contribution to the M3?


Thanks again.

Rod Merigan


Rod

In response to your questions below, financial assets such as asset-backed securities, bonds and shares are not included in money, even broad money, which is the most inclusive measure of money. The only tradable assets included in money are short-term in nature and include certificates of deposit, bills, promissory notes and commercial paper. That’s why transactions in asset-backed securities, bonds and shares between the financial sector and the private non-financial sector do not net off, and changes the supply of money.

Regards
Paul
Paul Dekkers | Manager | Media & Communications
RESERVE BANK OF AUSTRALIA | 65 Martin Place, Sydney NSW 2000
p: +61 2 9551 9833 | f: +61 2 9551 8033 | w: www.rba.gov.au

I feel the need to clear up one thing about the BoE paper



If we look at this diagram, what happens in the centre from left to right and back again is what MMT would call horizontal relations or horizontal transactions.  This is what the Bank of England paper talks about and gets correct.  The same style of economics Steve Keen and other "Circuitists" talk about.

I'm going on memory here but I'm fairly confident the BoE paper does not discuss the vertical transactions, the top to bottom relationships.  I thought it important that we clarify that.

MY EMAIL TO medialiason@treasury.gov.au

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Hi there,

I have been referred to Treasury by the RBA (who I was in turn referred to by the AOFM ... ) to find out some details about how Treasury works.

Here's the basic query:

On the RBA domestic market operations page it says that Treasury is a customer of the RBA and expenditure by the government credits bank accounts, and tax receipts have the opposite effect.

I spoke with the AOFM and they clarified how they issue bonds for the Treasury when the government deficit spends. Say Treasury wants to spend $600m they issue bonds in the amount of $600m, the private sector buys these bonds then Treasury spends that amount back into the system.

The end results it that where as previously we had $600m in reserves, we now have $600m in reserves plus $600 in bonds, which can be sold back to the RBA on the secondary market, and are essentially as good as cash.

We then also have the fact that the Official Public Account operated for Treasury by the RBA is a consolidated self executing fund, which is pretty jargony but sounds to me like basically the RBA can't bounce a Treasury cheque.

When I put all this together it just says to me that the government creates money when it spends, and that it must therefore destroy money when it taxes; that government spending is not constrained by taxation or "borrowing" and that what we call federal government debt isn't really debt at all.

Yet all we hear from the Treasurer is that we have to cut spending and that we have to "live within our means".

If the government creates net financial assets in the private banking system when it deficit spends, and if the RBA will never bounce a Treasury cheque, what exactly is the definition of the "means" of the government?

When and how would treasury "run out" of money? It seems impossible.

Thanks,
Iain
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Oh, another interesting statement was that when ScumMo says we have to "live within our means" what he's doing is oversimplifying the interaction between government expenditure and economic conditions in the private sector. I didn't get as far as getting Colin to state that he felt as though the government's spending was too contractionary and Colin certainly thought that we had to "repay the debt", that if we "printed money" to "repay debt" that it would be inflationary, and that we had to reign in the deficit.

But it's certainly the case that he agreed this was one way to set things up, that constraints really were allocation of GDP, not "dollars" etc.

But then he had a meeting in 5 minutes and had to go.

Oh well. The search continues.