During COVID, the RBA started quantitative easing - for the first time in Australia (in a significant way at least), my sources say this was ~$300,000,000,000 of bonds bought (300b of public debt)
My understanding is that this 300b was new money (created by fiat, by the RBA). Since our annual expenditure servicing our debt is now the same as the annual cost of Medicare (and growing) why can't the RBA simply cancel the debt?
I’d say those who have knowledge have the responsibility to educate others. I fear your ‘humans and greed’ comment may be a sort of mirror….
So you have just repaid the banks by stealing that wealth from the population by devaluing the currency.
Then the banks, being repaid would have more cash to lend at a 1:10 ratio (or more).
If you want to nationalise the banks then you need to do that, unfortunately taking control of the banking sector to that extent for the benefit of the people gets you labelled as a fascist.
Money creation is through the creation of debt. The below explain this in detail:
How Commercial Banks Really Create Money (the Money Multiplier is a MYTH).
https://www.youtube.com/watch?v=cDNSNX48Kmo
Understanding the Fed's "Money Printer" (QE, the Stock Market, and Inflation)
https://www.youtube.com/watch?v=K3lP3BhvnSo
Comedy gold
The RBA did not create fiat money to purchase the government bonds.
Quantitative Easing (QE) is the creation of central bank reserves (known in Australia as Exchange Settlement Balances) to purchase the bonds (this is the so called money printing - so no actual money was printed).
Exchange Settlement Balances can only be held by institutions with Exchange Settlement Accounts, so are not used within the economy.
The role of QE is to lower the risk free rate on government bonds (2 year, 10 year, 30 year, etc…).
QE is explained on the RBA's website: Unconventional Monetary Policy, under Asset purchases.
https://www.rba.gov.au/education/resources/explainers/unconv…
Thanks for this - it was helpful!
I don’t believe you are correct when you say the exchange settlement accounts are only to be held by institutions with Exchange settlement accounts…. I think the 300b created was new money created by the RBA only and is not held by other institutions.
Obviously it’s not ‘printed’ (it’s digital) but it’s completely new money - fiat money (because all our money is essentially fiat money)
If the $300B was new fiat money, how did it get into the economy? Who did the RBA give this new money to, and what did the RBA get in return? They don't just give out money, they still need to balance their books.
Regarding money creation, most is made by commercial banks (CBA, NAB, etc…) through issuing of new loans (not by the RBA). And money destruction happens when the 'principal' of the loan is repaid (with the banks getting the 'interest', which they then need to pay their debt obligations, that is depositors and commercial bondholders).
According to Bing Chat:
Exchange Settlement (ES) balances are the funds held by banks on deposit with the Reserve Bank of Australia. These balances are used to settle interbank transactions. Banks have deposit accounts at the Reserve Bank to record the value of their ES balances. Settlement takes place by debiting and crediting these accounts; that is, banks exchange their credit balances in ES Accounts, which are deposit liabilities of the central bank.
Money creation according to Bing Chat:
In Australia, money is created in two ways. The first way is through the production of physical currency. Australia’s banknotes are produced by the Reserve Bank of Australia, while coins are produced by the Royal Australian Mint. Banknotes account for most of the value of physical money.
The second way money is created is through the banking system. When banks make loans to customers, they create deposits in the customer’s bank account. These deposits are considered money and increase the overall money supply.
I could be wrong but I don't think quantitative easing was a major contributor to our inflation rate. Wasn't it primarily driven by global supply shortages with a bit of profiteering for good measure?
Because that $300b of debt is supposed to be paid back, or nullified. If you cancel the $300b, you essentially increase long-term money supply by $300b. That's it.
Debt can never be paid back.. it can only be discharged
If $300 billion can be borrowed, spent, and then written off as if it never existed, why wouldn't the government do it again and again? What would our trading partners think when they see $300 billion created and used to buy real goods and services, and then written off as if it never existed?
This idea that debt can be written off without consequences is dangerous. It leads down the pathway of Zimbabwe, Venezuela, Argentina, and numerous other hyperinflationary countries. Once trust is lost in sovereign debt it is almost impossible to gain back.
People have this notion that money is created 'out of thin air', but it really isn't if you don't want to destroy the economy.
People have this notion that money is created 'out of thin air', but it really isn't if you don't want to destroy the economy.
It actually is, but normally they tell us they're "targeting 2%", and usually we believe it.
You do know that almost every other country on this planet had an increase in money supply during the same period as well.
Did you try chatgpt? Its given me a pretty good answer:
While it might seem like a good idea to simply cancel government debt, it would have serious consequences for the economy and financial system. Here are some reasons why the government can't simply cancel its debt:
Default Risk: When a government issues bonds, it is essentially borrowing money from investors. If the government were to cancel its debt, it would be equivalent to a default on its obligations, which would make it more difficult and expensive for the government to borrow money in the future.
Inflation Risk: If the government were to cancel its debt by simply printing money, it could lead to an increase in the money supply, which could result in inflation. This would be especially problematic if it occurred rapidly and without a corresponding increase in economic output.
Loss of Credibility: If the government were to cancel its debt, it would damage its credibility and reputation among investors, which could make it more difficult for the government to borrow money in the future. This could lead to higher borrowing costs and a decrease in economic growth.
Impact on Financial Institutions: Government debt is often held by financial institutions, such as banks and pension funds, which use it to manage risk and generate income. If the government were to cancel its debt, it could have serious implications for these institutions, potentially leading to a financial crisis.
In summary, while cancelling government debt might seem like an easy solution to the problem, it would have serious consequences for the economy and financial system. Instead, governments typically rely on a combination of spending cuts and revenue increases to reduce their debt over time.
It always astounds me how little financial and economic literacy the vast majority of people have.
I don't believe the government can simply choose to repay some bonds and not others, so there are legal complexities on how to do this.
But ignoring that, there isn't really any reason they couldn't. The RBA would suffer a significant accounting loss due to their bonds being written down to zero and will likely have negative equity. However, this is not quite accurate since the RBA can print money and so really it has an asset of essentially infinite value. So, they will need to come up with some accounting chicanery to solve the solvency problem.
Of course, the politics around writing off those bonds would be complicated. You can see the reactions of a lot of others here being quite negative. You could imagine the press jumping on how the government made the RBA insolvent, runaway inflation, etc.
That debt has already been cancelled. It only exists as an accounting identity on the RBA's balance sheet. Australia has no intention of every paying it down by doing $300b of Quantative Tightening because that would cause a recession/depression. So, the money's been spent, it drove up asset prices (housing, stock market, etc.) and now it's showing up as inflation and by the end of the inflation we'll all be 20% poorer.
You will only be 20% poorer if either you had your wealth tied up in fiat currency, or had no wealth at all (living day-to-day).
If you kept your wealth in assets, which had also gone up by 20%, then you will be relatively no worse off in general (clearly not all assets are created equal, and some would have gone up more, and others gone up less or went down).
That is why wealthy people do better (relatively speaking) than those of middle-low wealth during times of high inflation. The wealth gap gets larger (greater inequality).
This is a major reason why inflation is so devastating, and needs to be bought under control as quickly as possible (hence central banks lifting interest rates so quickly and to a large degree).
Generally when you get inflation, asset prices go up quicker than inflation, as they are more scarce. Items which can ramp up output quantities quickly tend not to inflate as much, as the supply can outstrip demand, even with small changes in prices.
It is easy to cancel the $300b in debt but there is no political interest in doing so.
Just increase consumption and income taxes while slashing spending and cancelling all welfare payments and pensions.
Within a few decades the debt will be gone completely and we can be less restrictive in our monetary policy.
Yes your comment goes a long way to prove that the masses are thick.
The current financial system has issues, but it is also quite good.
The issue generally lie with people who do understand how the system works and leverage that to their own advantage (abuse the system at the expense of others).
People with knowledge of any system always have advantages over those that do not know.
I am sure if you had that knowledge you would also take advantage of it as well (humans and greed).
As you appear to lack that knowledge, all you can do is rage against the machine.