Budget

RBA Review part 2

December 4, 2022 by James J. Morrison W.G. Dupree Leave a Comment

This is a continuation of my October 2022 submissions in accordance with the review of the RBA announced by Treasurer Jim Chalmers in July. The continuation of my letter to the RBA addresses some of the public’s misperceptions concerning money, banking and the Reserve Bank of Australia. The first part of the letter appeared in the previous issue of Auswakeup, listed as part 1.

Misperceptions.

The issues of monetary approaches to affecting Unemployment and Fiat economies I have previously addressed are among many common public and media misrepresentations of the banking system. In these areas, it should be incumbent upon the government to educate the public through public broadcasting so that the expectations of the Reserve Bank are properly evaluated. These myths include:

Banks can only lend out money they have from depositors.
Credit is an extension of a money multiplier based on deposit reserves.
Quantitative Easing is printing free finance into the money supply.
Federal Treasury deficits are a liability to taxpayers.

At a Keystroke.

Money in Australia’s economy has two sources. First, that which the Government Treasury supplies through its fiscal agent, the Reserve Bank. In short, that money is spent into existence by the Federal Government. This money is called “Vertical” money, which exists within exchange settlement accounts between the Reserve Bank and the Private banks. As the public is not a joint holder of accounts of this type, such money is not available for lending to the public. Its only purpose is for interbank transactions, as well as the provision of hard currency (coins and banknotes) to banks for servicing the needs of their depositors. Secondly, a larger pool of credit via lending is generated “ex nihilo” in the economy through private banking, referred to as “horizontal” money. The Bank of England has explained this in detail. https://www.youtube.com/watch?v=CvRAqR2pAgw] When a bank lends, a deposit IOU is created within that bank using digital keystrokes. A customer’s deposit is both the bank’s liability and the customer’s asset. Deposits are fundamentally an IOUs from the bank. Similarly, when a bank makes a loan, the loan contract becomes a liability for the borrower and an asset for the bank. The banks create money for borrowers and also receive profit (in the form of interest) for themselves. There is a common banking franchise myth, that depositors provide deposits to participate in the funding of lending for which depositors receive interest payments for allowing the redirection of their funds. In this misunderstood perspective, the “franchiser” is the Bank assigned the right to market and distribute money on behalf of the depositor. The perpetuation of this myth in public debate and political pronouncements does a disservice to the public good.

Deposits/Reserves relevancy

Credit creation is simply about a bank finding a credit-worthy customer with whom it can create a digital deposit as an account with that bank with the expectation of future interest payments. The loan to the borrower becomes a bank asset, with an accompanying liability created by a computer entry, which generates the deposit for the borrower. None of the aforementioned Bank reserves is touched, and neither are deposits. The exchange settlement Account reserves are used only when the borrower spends that deposit in another bank. The reserves of the lending bank held at the central bank are transferred to the account of the payee in the other bank. This is how all bank transfers work; by using the central bank’s reserve accounts. Instead of describing this process in high schools and economics courses more generally, educational institutions have failed to adequately explain how the monetary system works. The government and a properly educated Board of the Reserve Bank need to address these realities. In regard to my familiarity with this, I worked at the Reserve Bank between September 2001 and October 2002, where I was involved in operations and technical security teams. I aided the reversal of the RITS system’s previous outsourcing of AlphaServers operating Open VMS previously managed by Austra Clear/SFE. At that time the money that churned between banks via their reserve accounts varied between $9b and $16b daily.

Quantitative Easing

In a financial crisis – such as what occurred during the pandemic – it became evident that excessive exchange settlement reserves were needed. The overused strategy of Central banks globally during the Pandemic was Quantitative Easing. The often-encountered talk of “printing money” is a red herring. Printing money depends on the demand for cash in the private sector – which is normally around 3% of the money supply – and never approaches more than a small portion of the digital money supply. Hard currency demand during the pandemic reached 17%. Digital money is the characteristic form of currency used in operations between the Reserve Bank and the private banking system. Quantitative Easing affects the money supply by increasing the banks’ ESA reserves at the Reserve Bank. This occurs when the Reserve Bank purchases Treasury bonds from the private non-bank sector (e.g. bond dealers, pension funds, asset managers) as well as from the private banks, and these purchases increase the volume of ESA reserves. This also means that more money is circulating in the private sector, which money may be used to pay off bank loans, thereby reducing the likelihood of further borrowings. Technically, increased reserves, while facilitating extensions of interbank transactions, have no direct impact on any credit creation expansion. Precisely what area of the economy Quantitative Easing serves is also of concern, as “employment growth” wasn’t one of them. The inequality of protecting financialised assets amongst the wealthy ruling class financial markets rather than the working class who lost jobs in the millions. As Adam Tooze, in his recent publication, “Shutdown”, observes:

“For the central bank, that meant holding interest rates down. Once again, it came down to financial markets. As far as anyone could figure out, QE worked by driving government bond prices up and yields down. Lower interest rates helped to encourage borrowing for investment and consumption. Lower yields also prompted asset managers to reallocate funds from Treasury markets, where prices were driven up by central bank buying, to riskier assets, like equity and corporate bonds. This boosted corporate borrowing and the stock market. It increased financial net worth and boosted demand. The supportive cooperation between central banks and treasuries in the common struggle against the coronavirus was thus, the central bankers adamantly insisted, no more than an incidental side effect of their frantic and clumsy efforts to manage the economy by way of financial markets. Despite the relentless accumulation of government debt on their balance sheets, the central bankers insisted that this had nothing to do with financing public spending. Their priorities were to manage interest rates and ensure financial stability, which in practice meant underwriting the high-risk investment strategies of hedge funds and other similar investment vehicles. Rather remarkably, they insisted that tending to financial markets was a more legitimate social mission than openly acknowledging the highly functional, indeed essential role they played in backstopping the government budget at a time of crisis.” [pg 149] [1]

When Financial markets become more important to the Reserve Bank than the well-being of the vast majority of Australians, then the bank’s philosophy is served and managed by too many businessmen/women who have a neo-liberal ideology to serve the interests of the few above that of the whole economy. As Curtin espoused, the Reserve bank’s original social mission is to “pursue a policy of low inflation, sustainable output and employment growth”. [2] This mission has evidently fallen away, as a consequence of the type of people chosen to run the Board of the Reserve Bank.

Taxpayer’s money?

Finally, It can be demonstrated simply by viewing the balance sheets (irrespective of the accuracy of dollar amounts) of the entities

the Federal Treasury,
Reserve Bank,
the collective private banks and
the collective non-bank private sector

that the deficit of the Federal Treasury is the combined surplus of the Australian economy’s private sector and foreign sector. Deficits are just the government’s way of provisioning the private sector. If a government wishes to pull the spending of an economy back and throttle the growth of an economy, it pursues a surplus for the Treasury, depriving the private sector of funds. John Howard, for example, achieved that when he throttled back the economy to provide the Treasury with a surplus. Consequently, the private sector, desperate for money, borrowed heavily from the Banks. Private debt expanded considerably under John Howard. [See here: The Howard impact or here: Debt, home repossessions portent for Australia poll]. But of course, Treasurer Jim Chalmers should already know this. Taxpayers are not on the hook for a federal government’s treasury deficit because that deficit just boosts taxpayers’ finances. The government’s debt is its problem, not ours, since the Treasury and Reserve Bank issue the dollar (which taxpayers don’t because that is a crime called “counterfeiting” for which it can prosecute us). The currency-issuing government can pay their debts at any time it chooses by simply issuing the appropriate quantity of currency to cover the debts. Admittedly, the wedging by political opponents and the Murdoch media would require of this government political courage, not financial inability.

Currency Issuing

Many members of the public believe that the issuance of Australian currency is the domain of the taxpayer. Aside from this being the description of the crime of counterfeiting (for which the Australian government would jail any offender), the Reserve Bank definitively sees the issuance of currency as its role. Despite the widely accepted myth about the existence of “taxpayer’s money“, the taxpayer is not an issuer of money, but rather is a user of it. The distinction between a money issuer and a money user is critical to the public understanding of monetary reality. The issuer of a sovereign currency is not operationally constrained and cannot be forced into default in its own currency. However, non-sovereign monetary currency issued or pegged to a foreign-issued currency such as we find within the Eurozone or for the example of Sri Lanka’s debts held in a foreign currency can, of course, lead to default. Australia, like Japan, the U.S., New Zealand and many others, are monetarily sovereign economies with no significant foreign debt and only face the constraints inherent in resource depletion and inflation. Users of Currency are everyone else, including taxpayers, municipalities, and the States and they certainly face monetary constraints. They must earn, budget and use the limited money they can acquire through business, taxation and exchange. Monetary issuers are not so constrained.

Knowledge is power

The problem is, if submissions for a public review of the functions of the Reserve Bank are to be effective, it is incumbent on the reviewers to have a realistic appreciation of how the banking system operates and the Reserve Bank’s role and function in Australia’s financial system. Holding to the public franchise myth, the NAIRU myth, and the Taxpayer funds myth, as many in the media (and possibly members of the Bank Board), will limit the usefulness of any submissions. Providing faulty recommendations to politicians who frequently use the analogy of a household budget to describe how fiat economies work is a recipe for disaster and subsequent legislative policies that will hamper the workings of the Reserve Bank to aid post-pandemic financial recovery. So we need governors and heads of departments within the RBA who know and understand inflationary causes, recognise the differences between supply vs demand causation and know that raising interest rates is an over-zealous intervention that cures symptoms by killing the patient.

Footnotes:

[1] Tooze, A. (2021). “Shutdown: How Covid Shook the World’s Economy.” Penguin Books Ltd. [pg 149]
[2] Edwards, J. K. (2011). Curtin’s Gift: Reinterpreting Australia’s greatest prime minister. Allen & Unwin [pg 142]

RBA Review part 1

December 4, 2022 by James J. Morrison W.G. Dupree Leave a Comment

In September 2022, the Reserve Bank of Australia was opened to public assessment. The submissions were to be part of a review announced by Treasurer Jim Chalmers in July. What follows is largely verbatim from my submission at the end of October. This will be published along with other reviews on the RBA review website in the week of December 5th. The Review Panel – comprising Renée Fry‑McKibbin, Carolyn Wilkins and Gordon de Brouwer- assesses those submissions. Certain aspects of my original review used in-house vernacular, presuming a specific internal bank knowledge. I have added further explanations of those concepts to facilitate a better understanding of this two-part series. Beyond these additional explanations, this is essentially the content of my submission. There are more embedded links than initially provided to the RBA to aid your further exploration.

======

Dear Minister Chalmers,

Thank you for the opportunity to contribute to this review of the Reserve Bank of Australia.

Themes

This submission covers Monetary policy frameworks such as adherence to the NAIRU and neoclassical “gold standard” mentality over that of monetary sovereign fiat economies. It covers RBA and Government communications about the Finance Franchise myths on Banking, in general. It is critical of the Board composition based on bias in inappropriate neoclassical education and the selection of business representatives instead of economists trained in the issues of fiat economies. Finally, it reviews the Interaction of monetary and fiscal policy with respect to RBA’s performance in applying monetary policy where fiscal policy is more appropriate. As a former employee of the Reserve Bank, I have some knowledge of the inner workings of the Reserve Bank. I understand the review of the Reserve Bank of Australia is underway to improve monetary policy and its success at realising its goals, governance by the Board, culture, leadership, and recruitment practices. Such a broad range of objectives has yet to be approached since the smaller incidental 1981 Campbell inquiry and before that, presumably at its inception in 1960.

Curtin

Over the last century, Australia’s Central Bank and economy have undergone many changes. In the previous World War, the Curtin Government asserted Commonwealth power over banking, which led to Ben Chifley’s later decision to legislate to nationalise the banks, effectively asserting Commonwealth control over money and credit as per the Commonwealth Bank Act of 1945. However, such nationalisation was later defeated in 1949, as the book “Curtin’s Gift” by John Edwards says on Pg 141. “Though the postwar Menzies Government amended Chifley’s central banking legislation to reintroduce a board, the Commonwealth’s last-resort power to direct the bank was retained in the legislation and remains today. The Commonwealth Treasurer has conferred on the bank an independent authority to make monetary policy, but it is a conditional independence to pursue a policy of low inflation, sustainable output and employment growth.” Curtin had also argued for two other changes,

Commit to a full employment policy to improve living standards and raise national development.
a floating exchange rate to free Australia from the fixed exchange rate with the British pound

Ben Chifley implemented the Full employment policy following Curtin’s full employment paper being submitted to Cabinet in March 1945. Until the rise of Neoliberalism in the 1970s, unemployment would remain dominantly at 2% (notably without substantial inflation).

Unemployment rate and NAIRU

This leads to the Reserve Bank’s first failure, which is its commitment to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). The RBA’s adherence to the economic self-deception espoused by the Phillips Curve model falsely supposes a trade-offbetween inflation and unemployment exists. That trade-off was initially set at 6% unemployment, then later 5%, then for some 4% despite the evidence of Australian history. The NAIRU is a systematically flawed perspective on inflation generated by a nation’s economy approaching full employment that should have died in Australia in the 1950s. Specifically, after Ben Chifley’s success with the Full Employment policy in Australia demonstrated for 25 years, full employment did not accompany rampaging inflation. Menzies nearly lost an election when unemployment, rose to 53,000 people or 3% at the end of 1960. It did, although, settle back to 2%. Australia abandoned Full Employment policies in the early 1970s. This led to increased unemployment and significantly growing inflation over the next decade. Supposedly this use of the Phillips curve fell out of favour after the great stagflation of the 1970s. Instead, this zombie economic perspective has been raised from the dead, evidenced in 2022 with the prospect of the RBA using that justification for raising interest rates. All purportedly to manage a disquiet of ABS’s unemployment measure at 3.5%. Notably for a working labour force over three times larger than that experienced by Menzies in 1961. Albanese’s claim in 2022 of the Job Summit was to seek a “Full Employment Summit” but baulked at the solution of the Curtin Government. Unfortunately, the neo-liberals of the political Party and the Bank adheres to the conservative myth of the NAIRU.

Instead of NAIRU, we should consider NAIBER – as a better alternative perspective, especially as the Bank incorrectly suggests we are already “fully employed”. [See Prof Mitchell’s analysis: Never trust a NAIRU estimate] Beyond Prof Mitchell’s frequent analysis of the NAIBER, Prof Steven Hail’s book “Economics for Sustainable Prosperity” explains it on page 242.

“NAIBER stands for the ‘Non-Accelerating Inflation Buffer Employment Ratio’. The buffer employment ratio replaces the unemployment rate with the ratio of workers in the job guarantee scheme relative to the total available labour force. This is the replacement of our existing buffer stock of the involuntarily unemployed and underemployed with an employed buffer stock of workers within a public-sector job guarantee. The scheme would be a shock absorber for the economy— expanding to employ workers when they have been shed from the private sector during a downturn, and contracting automatically as the private sector absorbs labour from the job guarantee scheme in an upturn. Ecological modern monetary theorists have referred to an ecologically sustainable NAIBER, or ESNAIBER, in the context of a job guarantee as an element in a transition to an ecologically steady-state economy, given the ecological constraints referred to above.“

Pandemic Unemployment measures to Sep 2022

The goal of “full employment” has been achieved if you conclude ABS measures domestic unemployment, which, as you can see from the graphs and my articles covering what should have resulted from the Job Summit [my article and graphs: Stagnating Summit’s Shortfalls]. This is why “what gets measured” is essential. I will not go into detail about the shortcomings of the ABS statistics as they are probably already well known, and if not, the article aforementioned herein, should inform you. Raising interest rates as a strategy to deal with inflations is problematic at best. The link between spending and interest rates is unreliable and unpredictable. Interest rates affect both supply and demand. Economic modelling of “supply and demand” is only relevant to highly atomised markets with many participants, like the primary sector. Secondary and tertiary sectors of the economy follow different models. Changes in interest rates can have a reverse effect on inflation. Higher interest rates only affect people with variable interest rate debts. They don’t affect fixed interest rate debt and people with no immediate financial obligation. Higher interest rates increase the income of creditors and redistribute income to the wealthier, rentier class, exacerbating inequality. Fourth, higher interest rates reduce the incentive to undertake debt and may cause “distress borrowing” to service existing debt or keep businesses afloat. The resulting Ponzi balance sheets do a disservice to the economy, and all of the above, risk yet another recession. The government should be applying fiscal, not monetary, policy to these issues rather than letting the Reserve Bank’s adherence to a disproven NAIRU theory collapse the economy into greater inequality.

FIAT economy

Paul Keating’s floating of the Australian currency in 1983 meant Australia entered a new economic space. We became a monetarily sovereign, fiat economy no longer tied to another currency or a gold standard (which even America had abandoned with the collapse of the Brenton Wood decisions in 1971). The implications of which even the Bank of England acknowledges even if neither our government’s political rhetoric nor Reserve Bank acknowledge. [Bank of England video: Money in the modern economy: an introduction – Quarterly Bulletin] Instead of shifting into this new space and engaging with this new paradigm of fiat economies, the neoclassical economic conversation stayed with the decades-old “gold standard” economics model. Still, neoclassical economics guides the decisions of the Reserve Bank’s mission to “pursue a policy of low inflation, sustainable output and employment growth.” [“Curtin’s Gift” by John Edwards pg 142] Problematically, even Board members of the Reserve Bank need to understand the basics of a modern monetary system. [Prof William Mitchell: The RBA has no credibility and the governor and board should resign]. The Reserve Bank’s role as the currency issuer for the government has been misunderstood by business board appointees blinded by the tunnel vision of their experience as currency users in the business community. Most of the Board are business people (five in number), three are neoclassical economists (Dr Lowe, Michele Bullock, & Ian Harper), and Dr Steven Kennedy is economics adjacent given his Doctorate was in the Economic Determinants of Health, which is not precisely about the Banking systems. None of the Board has any formal training in the economics of fiat economies or Modern Monetary economies. However, that isn’t to say their experience on the Board has yet to give them insight. Some suggest the RBA is best served with Board members selected based on expertise in modern monetary fiat economics rather than as political appointees because of their relationships with former Prime ministers. To this day, neoclassical economics still guides the decisions of the Reserve Bank’s mission to pursue a policy of “low inflation, sustainable output and employment growth” but has universally failed to achieve what Curtin & Chifley (and even Menzies) did for nearly three decades. Banking is widely misunderstood as a heavily regulated franchise industry acting as an intermediary between scarce private capital and borrowers. Modern finance is relatively scarce, and depositors are the source of money supplied to borrowers. [Cornell Law School paper: “The Finance Franchise”].

=======

My letter to the RBA continued to explore more of the myths believed by the public about money and banking. The letter reviewed the recent quantitative easing while serving the needs of the highly financed wealthy. It did sadly little for the well-being of the larger Australian public. All these are available in Rba Review part Two.

RBA review submission

October 31, 2022 by James J. Morrison W.G. Dupree Leave a Comment

In July, Treasurer Jim Chalmers announced an independent review of the Reserve Bank of Australia, and in September, the Bank Review panel released Issues Papers and calls for Public Submissions. The Review Panel – comprising Renée Fry‑McKibbin, Carolyn Wilkins and Gordon de Brouwer. As I said to the panel, I have written it as though writing to Treasurer Jim Chalmers. The closing date was the 31st of October, and because this will make for a long article, I will simply say, what follows, is my submission.

======

Dear Minister Chalmers,

Thank you for the opportunity to contribute to this review of the Reserve Bank of Australia.

Themes

I understand the review of the Reserve Bank of Australia is underway to improve monetary policy and its success at realising its goals, governance by the Board, culture, leadership, and recruitment practices. Such a broad range of objectives has yet to be approached since the smaller incidental 1981 Campbell inquiry and before that, presumably at its inception in 1960.

Curtin

“Though the postwar Menzies Government amended Chifley’s central banking legislation to reintroduce a board, the Commonwealth’s last-resort power to direct the bank was retained in the legislation and remains today. The Commonwealth Treasurer has conferred on the bank an independent authority to make monetary policy, but it is a conditional independence to pursue a policy of low inflation, sustainable output and employment growth.”

Curtin had also argued for two other changes,

1. Commit to a full employment policy to improve living standards and raise national development.

2. a floating exchange rate to free Australia from the fixed exchange rate with the British pound

Ben Chifley implemented the Full employment policy following Curtin’s full employment paper being submitted to Cabinet in March 1945. Until the rise of Neoliberalism in the 1970s, unemployment would remain dominately at 2% (notably without substantial inflation).

Unemployment rate and NAIRU

This leads to the Reserve Bank’s first failure, which is its commitment to the NAIRU. Interestingly Albanese’s claim of the Job Summit was to seek a “Full Employment Summit”. But unfortunately, the neo-liberals of both the political Party and the Bank adhere to the conservative myth of the NAIRU. Instead of a NABIER – as a better alternative perspective, the Bank incorrectly suggests we are already “fully employed”. [See Prof Mitchell’s analysis: http://bilbo.economicoutlook.net/blog/?p=44910 ] A goal that has been achieved if you conclude ABS measures domestic unemployment, which, as you can see from the graphs and my articles covering what should have resulted from the Job Summit [my article & graphs: https://theaimn.com/stagnating-summits-shortfalls/]. This is why “what gets measured” is essential. I will not go into detail about the shortcomings of the ABS statistics as they are probably already well known, and if not, the article aforementioned herein, should inform you.
Raising interest rates as a strategy to deal with inflations is problematic at best. The link between spending and interest rates is unreliable and unpredictable. Interest rates affect both supply and demand. Economic modelling of “supply and demand” is only relevant to highly atomised markets with many participants, like the primary sector. Secondary and tertiary sectors of the economy follow different models. Changes in interest rates can have a reverse effect on inflation. Higher interest rates only affect people with variable interest rate debts. They don’t affect fixed interest rate debt and people with no immediate financial obligation. Higher interest rates increase the income of creditors and redistribute income to the wealthier, rentier class, exacerbating inequality. Fourth, higher interest rates reduce the incentive to undertake debt and may cause “distress borrowing” to service existing debt or keep businesses afloat. The resulting Ponzi balance sheets do a disservice to the economy, and all of the above, risk yet another recession. The government should be applying fiscal, not monetary, policy to these issues rather than letting the Reserve Bank’s adherence to a disproven NAIRU theory collapse the economy into greater inequality.

FIAT economy

Instead of shifting into this new space and engaging with this new paradigm of fiat economies, the neoclassical economic conversation stayed with the decades-old “gold standard” economics model. Still, neoclassical economics guides the decisions of the Reserve Bank’s mission to “pursue a policy of low inflation, sustainable output and employment growth.” [“Curtin’s Gift” by John Edwards pg 142]

Problematically, even Board members of the Reserve Bank need to understand the basics of a modern monetary system. [Prof William Mitchell: http://bilbo.economicoutlook.net/blog/?p=49696] The Reserve Bank’s role as the currency issuer for the government has been misunderstood by business board appointees blinded by the tunnel vision of their experience as currency users in the business community.

Most of the Board are business people (five in number), three are neoclassical economists (Dr Lowe, Michele Bullock, & Ian Harper), and Dr Steven Kennedy is economics adjacent given his Doctorate was in the Economic Determinants of Health, which is not precisely about the Banking systems. None of the Board has any formal training in the economics of fiat economies or Modern Monetary economies, although that isn’t to say their experience on the Board has yet to give them insight. Some suggest the RBA is best served with Board members selected based on expertise in modern monetary fiat economics rather than as political appointees because of their relationships with former Prime ministers.

To this day, neoclassical economics still guides the decisions of the Reserve Bank’s mission to pursue a policy of “low inflation, sustainable output and employment growth” but has universally failed to achieve what Curtin & Chifley (and even Menzies) did for nearly three decades.

Banking is widely misunderstood as a heavily regulated franchise industry acting as an intermediary between scarce private capital and borrowers. Modern finance is relatively scarce, and depositors are the source of money supplied to borrowers. [Cornell Law School paper: “The Finance Franchise” https://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2660&context=facpub]

Misperceptions.

This is among many common public and media misrepresentations of the banking system. In these areas, it should be incumbent upon the government to educate the public through public broadcasting so that the expectations upon the Reserve Bank are properly evaluated. These myths include:

Banks can only lend out money they have from depositors.
Credit is an extension of a money multiplier based on deposit reserves.
Quantitative Easing is printing free finance into the money supply.
Federal Treasury deficits are a liability to taxpayers.

At a Keystroke.

Secondly, a larger pool of credit via lending is generated “ex nihilo” in the economy through private banking, referred to as “horizontal” money. [Also, the Bank of England: https://www.youtube.com/watch?v=CvRAqR2pAgw] When banks lend, they create deposit IOUs within that bank. Bank’s customer deposits are their liability, and the loan is their asset created by keystrokes. Deposits are fundamentally an IOU from the bank. Similarly, when a bank makes a loan, they generate an IOU deposit for the lender at that bank. The complementary asset for the bank is the loan. Banks create money for borrowers and profit (the interest) for themselves.

Unlike the banking franchise myth, deposits or reserves do not create or limit loans. The perpetuation of this myth in public debate and political pronouncements does a disservice to the public good.

Deposits/Reserves relevancy

Instead of adequately describing this in High School and economics education, the government needs to explain how the monetary system works adequately. The government and a properly educated Board of the Reserve Bank need to address these realities.

Regarding my familiarity with this, I worked at the Reserve Bank between September 2001 and October 2002, where I worked on both the operations and technical security teams at the Reserve Bank. In that capacity, I aided reversing the RITS system’s previous outsourcing of AlphaServers operating OpenVMS, previously managed by AustraClear/SFE. Back then, the money churned between banks via their reserve accounts oscillated between $9 to $16 billion daily. The monitoring of that transfer between private bank accounts is the RITS system at the Reserve bank running on an Alpha-VMS mainframe that monitors all account exchanges between banks, which is the system I helped bring back in-house.

Quantitative Easing

In a financial crisis – such as the Pandemic – excessive needs for Exchange Settlement Reserves become evident. The overused strategy of Central banks globally during the Pandemic has been Quantitative Easing. Despite the talk of “printing money”, that is a red herring. Printing money depends on the demand for cash in the private sector – generally around 3% – and never reaches a point where it even approaches a small portion of the digital money supply. Hard currency demand during the Pandemic reached 17%. Digital money is the normality between the Reserve Bank and the private banking systems.

Quantitative Easing affects the money supply by increasing the banks’ ESA reserves at the Reserve Bank. This is done by the Reserve Bank repurchasing Treasury bonds from the private non-bank sector (i.e. pension funds & asset managers) and the private banks. The purchases from the private banking sector rise in digital money extend the ESA reserves. Many private sales of Government Bonds mean more money is circulating in the private sector that may be used to pay off bank loans, reducing the likelihood of borrowings. Technically, increased reserves, while facilitating extensions of interbank transactions, have no direct impact on any credit creation expansion.
Precisely what area of the economy Quantitative Easing serves is also of concern, as “employment growth” wasn’t one of them. The inequality of protecting financialised assets amongst the wealthy ruling class financial markets rather than the working class who lost jobs in the millions. As Adam Tooze, in his recent publication, “Shutdown”, observes

The supportive cooperation between central banks and treasuries in the common struggle against the coronavirus was thus, the central bankers adamantly insisted, no more than an incidental side effect of their frantic and clumsy efforts to manage the economy by way of financial markets. Despite the relentless accumulation of government debt on their balance sheets, the central bankers insisted that this had nothing to do with financing public spending. Their priorities were to manage interest rates and ensure financial stability, which in practice meant underwriting the high-risk investment strategies of hedge funds and other similar investment vehicles. Rather remarkably, they insisted that tending to financial markets was a more legitimate social mission than openly acknowledging the highly functional, indeed essential role they played in backstopping the government budget at a time of crisis.” [pg 149]

When Financial markets become more important to the Reserve Bank than the well-being of the vast majority of Australians, then the bank’s philosophy is served and managed by too many businessmen & women with a neoliberal ideology to serve the interests of the few above that of the whole economy. As Curtin espoused, the Reserve bank’s original social mission is to “pursue a policy of low inflation, sustainable output and employment growth”. This mission has evidently fallen, by the way, because of the people chosen to run the Board of the Reserve Bank.

Taxpayer’s money?

Finally, It can be demonstrated simply by viewing the balance sheets (irrespective of the accuracy of dollar amounts) of the entities known as

the Treasury,
Reserve Bank,
the collective private banks and
the collective non-bank private sector

that the federal deficit of the Treasury is the surplus of the Australian economy’s private (and foreign) sector. Deficits are just the government’s way of provisioning the private sector. If a government wishes to pull the spending of an economy back and throttle the growth of an economy, it pursues a surplus for the Treasury, depriving the private sector of funds. John Howard, for example, achieved that when he throttled back the economy to provide the Treasury with a surplus. Consequently, the private sector, desperate for money, borrowed heavily from the Banks. Private debt expanded considerably under John Howard. [See here: https://insidestory.org.au/the-howard-impact/] [or here https://www.reuters.com/article/uk-australia-politics-idUKSYD21821020070508] But of course Mr Chalmers, you should already know this.

Taxpayers are not on the hook for a government’s treasury deficit as that deficit just boosted taxpayers’ finances. The government’s debt is your problem, not ours, since the Treasury and Reserve Bank issue the dollar (which taxpayers don’t because that is a crime called “counterfeiting” with which you would charge us). The currency-issuing government can pay their debts off any time they choose by issuing the dollars to cover them. Admittedly the wedging by political opponents and the Murdoch media would require of this government political courage, not financial inability.

Knowledge is power

The problem is, if submissions for a public review of the functions of the Reserve Bank are to be effective, it is incumbent on the reviewers to have a realistic appreciation of how the banking system works and the Reserve Bank’s role in our financial system. Holding to the public franchise myth, the NAIRU myth, and the Taxpayer funds myth, as many in the media (and possibly members of the Bank Board), will limit the usefulness of any submissions. Providing faulty recommendations to politicians who frequently use the analogy of a household budget to describe how fiat economies work is a recipe for disaster and subsequent legislative policies that will hamper the workings of the Reserve Bank to aid post-pandemic financial recovery.

So we need governors and heads of departments within the RBA who know and understand inflationary causes, recognise the differences between supply vs demand causation and know that raising interest rates is an over-zealous intervention that cures symptoms by killing the patient.

Thank you for the opportunity to submit this letter for your review.

Yours sincerely,

John Haly.
(Auswakeup Media)

[Correction: An earlier version of this article was not “absolutely pedantic accurate” as Inflation from 1945 to 1970 was so small compared to what followed, as to be negligible, but as it wasn’t nonexistent the phrase at the end of the section on Curtin has had the word “substantial” added.]

Negative Gearing

June 18, 2016 by James J. Morrison W.G. Dupree 1 Comment

Private debt in Australia has escalated beyond the $2 Trillion mark shooting past Australia’s GDP of $1.6 Trillion by 123%. Housing affordability is reaching crisis levels driven beyond the budgets of many Australians, by negative gearing and capital gains concessions.

In fact, we have just bypassed Denmark (the previous first placeholder) to hold the prize for the single largest ratio of household debt to GDP. Our government net deficit/debt is minuscule by comparison at only 17% of GDP. It was only 11% when Labor left Office. At the time, Australia had the third smallest net government debt relative to GDP in the OECD. Unfortunately, the sheer hysteria over government debt expressed by Joe Hockey led many voters to believe this was significant. Ignoring that Australia used to be one of the world’s best-performing economies in 2013. One of the predominant components of any magic act is the art of distraction. Hockey, and later Morrison, frequently shrieked at the “mouse” of Government debt to catch your eye, while allowing the “elephant” of private debt to sneak across the stage. Despite doubling our deficit since then, we are still in an internationally enviable position as far as Government net debt is concerned.

A little perspective on the debts of our nation?

The issue of negative gearing has been confusing for both the Coalition and the public. Kelly O’Dwyer was contradicting Malcolm Turnbull on whether or not the revocation of negative gearing would result in house prices falling or rising, did nothing to assure the public.

ABC’s Lateline hosted a debate between IPA Stalwart, Sinclair Davidson and economist Saul Eslake on the 10^th of May 2016. Saul suggested Negative Gearing (which he has opposed for 30 years) was costly and ineffective for its originally intended goal. Saul referenced the Reserve Bank’s analysis and the Grattan Institute’s research, as supporting his case. Davidson referenced his own personal “number crunching” but mainly appeared to channel his inner apprehensions over losing negative gearing. Curiously he claimed the “poor folks” who earned only $100K a year were not “rich”. (Despite that only 10% of Australian taxpayers can earn more than that.) With that redefinition of “relative poverty” in place, he argued negative gearing was not “a lurk or a rort for the rich”. He provided neither his “modelling” nor independent evidence that the absence of negative gearing would cause housing prices would decline. He was, although, perfectly prepared to disparage the modelling conducted by the Grattan Institute. In fact, pages 30 to 32 of the report go to some length to explain why it is unlikely to do as Davidson feared. These pages explain that a 2% reduction in the normal 7.3% average growth experienced since 1999 is the most its absence would affect the rate of growth.

Negative gearing is designed to compensate for the losses encountered by a borrower for an investment property where the rent and costs of managing the investment exceed the cost of borrowing. In Australia and New Zealand deductions for negatively geared losses on a property can be made against income from any other source. In other countries, this is quarantined. For example, in Canada, losses cannot be offset against wages or salaries. Similar restrictions exist in the UK and Netherlands. Australia has by far the most generous conditions now. Before 1985 it had been quarantined so losses could not be transferred to an individual’s income from labour.

Between July 1985 and 1987, the Hawke government abolished it and rent prices fell everywhere except in Perth and to a lesser extent in Sydney. This price fall was not due to Negative Gearing’s absence, but the meagre “available” vacancy rates and competition from inflated rent prices. (Grattan Report: Page 34-34) After that though, a less quarantined negative gearing was reinstated.

Housing & Rent prices rose but not at the rate they have since 1999. What mitigated the potential effects on the economy of unchecked negative gearing, was the 1985 introduction of a CPI indexed Capital Gains Tax. In 1999, the Howard government removed indexing and introduced a 50% discount for capital gains for individuals. From that point on, housing prices (and rent) skyrocketed an average of 7.3% annually. (Grattan Report: Page 31) The 2010 Henry Tax Review recommended reining it in, and at the very least, capping the deductions. The Labor and subsequent Liberal governments chose to ignore this. In 2013-2014 these features of Negative Gearing & Capital Gains cost the Tax department $11.7B a year in deductions claimed. (Grattan Report: Page 34-34)

Negative Gearing was originally touted as a means to increases the supply of rental property and decreases the rent charged by Landlords. Lobby groups with enormously financially vested interests such as the Taxation Institute of Australia and Real Estate bodies continue to do so. Like bad journalism, they have a dislike for when the facts get in the way of a good story. In fact, precisely the opposite of their claims has occurred.

While housing construction has grown, occupancy or use has not. Sydney, by way of a singular example, is a City of between 90,000 unoccupied homes. There are 83,000 in Melbourne. Notably, we have 45,000 homeless, Australia wide.

So the myth of housing scarcity that requires Negative Gearing to support it is not born out of anything other than a fabrication. That isn’t to say that the “scarcity” isn’t artificially maintained by refusing access to these unoccupied properties. These properties are primarily bought by Chinese investors needing to launder illicit funds.

The argument put forward by the Government though is that the majority of negatively gearing taxpayers earn under $80,000 and revoking it would adversely impact these “mum & dad” investors from “getting ahead”.

As Tax earnings go, it’s an interesting choice from which to start. Especially when you consider that the median wage in this country is more accurately $52,000. Only 40% of negatively gearing taxpayers lie below this median income. So why do the Liberals and the IPA spokesman, Sinclair Davidson, begin focusing on $80K? It’s not the average medium wage, so what does it represent? Is it because it is the lowest rounded number figure in which the majority of negative gearing taxpayers exists below? That being 67%. (Cart before horse thinking?) It’s the point at which the Liberals can confidently say the “majority exist”. Taxpayers that earn greater than that $80k demarcation represent only 20% of all taxpayers.

There are three problems with this analysis spoken of in these terms.

The large percentages are a deception because we are talking about a minimal subset of all taxpayers.
We are using taxable income as the measure after they are adjusted for negative gearing.
The undeclared interest these politicians have in maintaining the status quo.

Notice the use of the term “negatively gearing taxpayers” because the reality on the larger scale is, that “negatively gearing taxpayers” represent just under 10% of ALL taxpayers. So regarding total taxpayers it is 6.7% of all taxpayers that negatively gear and earn less than $80,000. Conversely only 4% of all taxpayers therefore negatively gear and earn less than the median wage of $52K. More than 90% of taxpayers don’t negatively gear and just want an affordable home in which to live.

The level of “earning” is based on declared income to the Tax department after negative gearing losses have been deducted. As many corporate figures and recent tax avoidance scandals do suggest, there must be a lot of individuals pulling in very, very large incomes but whose “declared” income is so modest that they pay negligible tax. The whole purpose of negative gearing is to lower your “taxable income”. (Grattan report: Pages 27&28) So using a measure of “Taxable income” as a valuation is a smart statistical deception. “The typical tax savings for negatively geared individuals is $1,800 per year”, although it may be as much as $11,800. An individual could conceivably be earning the pre-gearing taxable income of $90K a year and still fall into the category of being “below $80K of taxable income”. If you take out rental losses from negative gearing from taxable income then only 56% of people who negatively gear are in reality earning less than a disposable income of $80K (or 5.6% of all taxpayers). A similar adjustment for the median average taxable income is 33% (or 3.3% of all taxpayers). Negative gearing mainly benefits those on higher incomes as the top 10% of taxpayers receive almost 50% of the benefits from it. (Grattan report: Pages 27-29) The suggestion that it doesn’t, borders on hallucinatory ideology or deceit. This is the realms of magicians and conjurers.

Even before becoming Prime Minister as a high-profile Communications Minister, Malcolm Turnbull owned an impressive portfolio of seven properties, and many of his ministers have similar conflicts of interest. Interestingly it is Turnbull’s electorate who are the biggest negative gearers in the country. It is no wonder the Government resists any action to repair the economic damage done by this facility.

Warnings about housing bubbles bursting have appeared for a while. As Jessica Irvine wrote in the SMH, Sydney houses now cost “12 times the annual income”, up from four times from Gough Whitlam’s time. Jessica went on to describe it as a “classic Ponzi scheme” which is even how Liberal Backbenchers like John Alexander have described it. Walled Aly discussed these faults on “The Project” on the Coalitions negative gearing claims, which may engage from the perspective of the graphics, the numbers quoted and the nonpolitical research provided.

If economic rationalism, the deterioration of wages, rising living costs and housing & rent price explosions hadn’t caused as much damage as it has to our economy, negative gearing could have been easily dismissed. It has become a much more complex and entrenched mechanism. Labor’s grandfathering negative gearing strategy is one safer way to ease out of the problem. Affordable housing will continue to evade the grasp of average Australian in pursuit of the “great Australian dream” of home ownership while the current system is maintained. The only hope many Australian’s have for affording to buy a home in the future is if negative gearing and the capital gains concessions are dismantled. (Grattan report: Pages 46-47)

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Internships and Growth

May 18, 2016 by James J. Morrison W.G. Dupree Leave a Comment

Scott Morrison the magician, illusionist extraordinaire, has made all Australia’s failing job & economic growth problems vanish in a puff of smoke and mirrors (with apologies to John Passant for stealing his phrase). He has created a grand facade of jobs springing miraculously from the presumption of Australia’s economically fertile soil. Drought resistant and immune to the emerging heat of anthropomorphic climate change (which was provided with no new solution in the 2016 Budget) our economy is expected to blossom with “-Jobs and Growth”. Prosperity is forthcoming to the families of Australia, except for those who are too lazy to earn over $80K a year! To cheers of “Hear! Hear!” amongst his colleagues, Morrison & Turnbull supercharged the great Australian dream of owning your own home. It is now, apparently, attainable by one year’s olds and children of financially well-endowed parents throughout the land. Not earning enough, then fret not! Our unregulated “scandal-free” banks will inflate your income on their paperwork. Hence your appearance as a newly minted millionaire will allow you access to funds you never dreamed you could have, much less pay back. Foreign investors looking at the bank’s books will loan us cheap money because they are too addled by the theatrics of our slight of hand. So hoodwinked that they fail to recognise a proliferation of highly leveraged loans. They barely acknowledge that countries where much smaller housing price to personal income ratios than Australia’s, have been characterised by collapsing economies. (Australian repayment rates in Sydney are 12.2 times the median salary) These lessons from history are nothing but smoky memories. Their amnesia over housing crises that have collapsed economies previously makes these investors inept at recognising our negatively geared Ponzi scheme. Certainly, no one pays attention to the fact that Australian mortgage debt is equivalent in value to 123% of Australian GDP. In the next term under the Liberals, we will all have jobs producing wealth enough for us to continue to support this mountain of debt? Wow! Welcome to Australia, a land of magic, miracles and illusion. Let us dazzle your senses, while we pick your pocket in search of some way to raise our revenue to maintain helicopter riding politicians’ out of pocket expenses.

Budget 2016 was a menagerie of shameless self-promoting political aggrandisement and back slapping. All designed to create an illusion they have a magically restorative budget that will provide jobs for us all. But as any pundit watching a magic show wants to know, “how do they do that?” So let the revelation begin.

ABS V Roy Morgan - size matters — ABS V Roy Morgan – size matters

The unemployed begins the illusion. That much maligned 10.4% of the workforce (April Roy Morgan stats) that the ABS desperately tries to sell you like 5.7%, so you don’t understand how significant the issue is. If a Newstart recipient works for so much as an hour (paid or unpaid) in four weeks, they are no longer registered as unemployed by the ABS. They still, although, may retain dole payments because they have earned little to nothing. Unemployed people who cannot declare they are ready to work immediately, whether because of other commitments or because they are so completely in a state of dysfunction that they cannot respond, are also eliminated. Hence single parents with responsibilities to children or disabled persons moved across to Newstart, simply don’t count and are not counted. The ABS’s methodology hides the real size of the “rabbit” the Government is trying to keep under their hat.

But as Michaleia Cash would intimate, all you had to do is follow the golden Liberal “PaTH”! Announcing the unemployment solution of “internships”! That government conjuration that pays businesses $1000 to accept unemployed people to perform 25 hours of tasks for them a week. The government funds interns at below minimum wage rates. They are compensating “interns” with a surplus $100 a week. To redress that, the government cut the “newstart” base support rate in the 2016 budget. Despite the Business Council of Australia arguing “the Newstart Allowance is so low it may be bad for the economy as it prevents people finding work and risks entrenching poverty.”

Contrary to some hysteria of $4/hr that social media is alarmed about; that is the $100 incremental rate change. Given the current single person’s dole rate of $263.30 a week after adding $100, the aggregate rate represents around $14.53/hr. That valuation is nothing about which to boast. It is still well below the poverty line. It is certainly less than the legislated minimum wage that was of concern to the Business Council. All for the aspirations of the unemployed who crave a chance at ongoing work for a fair wage.

Why would not businesses take advantage of “PaTH” interns as free labour and simply churn through them? Michaelia Cash’s claim, to be able to block companies from doing that, outlines no viable strategy to accomplish this? Why might I suggest businesses will exploit interns? Because businesses already have!!

The Monthly’s Richard Cook points out: “An Interns Australia report in 2015 found 86.4% of interns surveyed were not paid or were paid below minimum wage, and 78.92% reported that their internship did not lead to paid work with the same company. This unpaid precariat accept it as part of the price (or lack of price) for this brave new world of workplace flexibility and personal entrepreneurship.”

So “internship” solves everybody’s problem! Satisfies those “communists” on the left wing of the Business Council of Australia, who want to pay unemployed youth more. The true believers on the right wing of the BCA are granted free labour for 12 weeks. All participating businesses get $1000 for each unemployed person they consume. Unemployment plummets because they have “worked” for more than one hour. The jobless vanish from the ABS’s books. Workers compensation is not required as technically; interns are branded as volunteers. The government has solved everyone’s issues in one single policy. Well except for the unemployed, that crave a real job. But then they don’t matter, as they don’t have the financial capacity to bequeath wealth as political party donations. The Rabbit has vanished, and the black hat is empty!

Magic performed! The unemployed vanish beneath the ABS cloak of invisibility. Business’s unskilled, manual labour workload disappears as the unpaid fairies at the bottom of the garden do all the work. The government has apparently found more people work as they are less unemployed. Businesses are booming as costs are down, and CEOs can award themselves higher wages. Prosperity lavished on all. The last vanishing act will be the business profits as they are stashed overseas in Panama or the Virgin Islands. And that, dear reader, is how job’s growth is performed.

The IGR

March 17, 2015 by James J. Morrison W.G. Dupree 1 Comment

The intergenerational report (IGR) produced by the government is another fraud like the “Budget Emergency” (which they seem far less panicked about since they doubled the deficit – which if you have read the main page you will realise means little). The prospect of not achieving a surplus is merely because their ideology prevents it, not because it’s unachievable. It is beyond their ideological capacity of thinking of retracting the massive subsidies to Mining, huge defence spending, huge “subsidies” to Super, huge “subsidies” to investors but not beyond them to cut subsidies to tuition in Universities. Instead, there were the cuts suffered by everything from the ABC, CSIRO, Trade Cadetships, Health, Hospital, Climate management, ATO, and even our children’s education (i.e. Gonski). Then the removal of major revenue streams (mining & carbon taxes – minimally over 6.5 billion), the 8.8 Billion Hockey gave away to the Reserve Bank – they said they didn’t need – and let’s also include the failure to collect taxes from 30% of the country’s largest companies. If achieving a surplus was such an urgent consideration, there are billions recoverable from the list above which would result in Australia having that (were it even an important factor in our economy). Add to this the fraudulent nature of our claiming national poverty for the 14 wealthiest nation (regarding gross domestic product per capita in IMF$,) in the world (Yes, Australia) with the third lowest gross debt to GDP of any country in the OECD.

Budgetary deterioration under the "Adults". — Budgetary deterioration under the “Adults”.

If a deficit is supposedly a measure of financial progress in a sovereign economy (which it isn’t) then doubling that Deficit under Joe’s administration surely is a poor indicator. If anything it merely exemplifies that what Australia can not afford is to continue to subsidise our wealthiest individuals and companies. It is purely about “political will” to act to redistribute the economy fairly, not an incapacity to bring in revenue.

The IGR has no allocation for disaster relief because of increasing natural disasters triggered by Climate change, in fact, Climate change is only mentioned in relation to the Direct Action policy (which a long list of experts believe will be completely ineffective anyhow). A slow economic growth (consistent with current) will result in a budget shortfall for Hockey alone. [Note: the mining boom contributed nothing/zero/zip/nada to economic growth in the last quarter – dropping from 5.6% in 6 mths – and professional/scientific/technical contracted by 1% – (ABS stats – look them up yourself)]. As jobs growth contracts and unemployment expands [i.e. as jobs disappeared from mining the expected pickup in Construction has not occurred and has fallen from 7.9% contribution to GDP to 5.6% in 6 mths], our prospects are grim. A ratio of jobs to the unemployed is 1:5 – although moving thru to 1:6 and that is only if you accept Govt Stats on employment & unemployment. (If you look at more realistic stats such as Roy Morgans then the prospect is far worse at 1:8.) ACOSS has noted that the IGR report is silent on what poverty would result by full implementation of government policies. No indicator of the Gini coefficient (an standard reporting indicator for the socio-economic impact of policies) has been provided. I wonder why Hockey forgot that? The value of the all ordinaries on the Australian Stock Exchange has fallen, consumer & business confidence is collapsing, the Aussie dollar is at the lowest level since 2010 and inflation went up from 2.4% to 3.0% last year. (Yes, it has fallen this year, along with everything else too.) BUT the Adults are in Charge of our economy! Bejesus, Hockey, give us a break!