Where's the money coming from?

Where’s the money coming from for the government’s $130 billion wage subsidy? How can it ever be repaid?

If the government borrows from its own bank, the Reserve Bank (RBA), when the money is repaid, it is repaid to itself. It is simply an institutional arrangement transferring funds from one pocket to another.

The RBA updates its balance sheet every week and over the last three weeks it has lent banks a total of $89 billion. Where did RBA get the funds from? Out of thin air. The banks handed over $89 billion of assets and the RBA put $89 billion into their bank accounts. A large portion of the assets purchased by the RBA will have been the government’s own bonds. The government’s own bank now owns some of its debt. Net debt owing to third parties has been reduced.

The government has started issuing bonds at the rate of $2 billion per day to pay the $130 billion in wage subsidies, facilitated by the newly created money in banks’ accounts. It is highly likely the RBA will purchase some of the bonds in the same way as described above. It needn’t use this two-stage process, with the government issuing bonds and then the RBA purchasing them in the secondary market. It could instead arrange for the RBA, to directly fund future deficits by simply marking up the government’s bank account by the relevant amount.

Let’s say the government uses the two-stage process and the RBA ends up with a swag of government bonds on its balance sheet. The government will pay interest on the bonds which the RBA will return as dividends. When it comes time to redeem the bond the RBA will hand back the bond and receive cash. The cash will represent RBA’s profit on the deal. Remember it bought the bond with funds out of thin air, but it ends up receiving cash when the bond is redeemed. How good is that? The RBA will then pay the profits back to government as dividends. It’s cash neutral. It’s painless. Future generations aren’t burdened. The opposite will occur. Future generations will benefit by our willingness to spend money now.

The scare stories about crippling future generation with mountains of debt are just that. They’re scare stories. The Australian government will always be able to decide whether it needs to issue bonds (or raise taxes) before spending, or whether the RBA just marks up its bank account with the necessary amount. The spending effects are similar. The RBA can purchase issued bonds as occurs in other countries (a process termed quantitative easing). The RBA has signalled it will continue to purchase bonds as part of its monetary policy to control interest rates.

Just over a week earlier the RBA announced a $90 billion Term Funding Facility for our major banks. The RBA will lend banks $90 billion at an interest rate of 0.25 per cent so they can lend to small and medium sized businesses. Banks will need to lodge bonds with the RBA as security. The Term Funding Facility is designed to provide funds to banks who have accounts with the RBA. Smaller lenders are being assisted with a $15 billion Structured Finance Support Fund, while other businesses are being assisted directly via a $2 billion Australian Business Support Fund. The schemes were instituted because the current banking system is not up to the task.

Banks need deposits to balance their books, not to lend. Banks have created almost all money in our economy simply by making loans. They don’t transfer money out of someone else’s bank account or from a bank vault. They create money out of thin air. Which has mainly been used to bid up the prices of assets especially existing houses, which are then used as collateral for more loans. It’s a Ponzi scheme which enriches bankers and shareholders via sacred franking credits and creates a growing chasm between homeowners and renters. The too-big-to-fail banking system has failed the community.

Governments too can create money out of thin air just as private banks do. Hopefully in a more responsible manner. They needn’t borrow from the money sloshing around the economy which was created by banks mainly for asset speculation.

When businesses run into trouble, they raise more equity or borrow. The Australian government can borrow from third parties by issuing bonds, but it also has the luxury of being able to source money from its own bank. Whether by funding deficits directly or indirectly via bonds bought by the RBA, the result is the same. We benefit from the spending. Public equity increases. To borrow a phrase from Alan Kohler, governments needn’t “be shackled by the leg irons of public debt.” That’s why the government’s spending splurge is to be applauded, not feared. It should mark a turning point for our federation.

(Published in The Mercury 9th April 2020)