One for the economists: Just Print Money.......it's OK.

[El Presidente]

From our Deputy Reserve bank Governor. 

I don't think that she mentioned the small issue of "infaltionary pressure" from such a strategy 

 

"We can create money," she said during the Q&A. "That's what we did when we bought the bonds. We created money and bought the bonds."

 

The RBA will not become insolvent

Ms Bullock made the comments during the Q&A session after a speech to Bloomberg in Sydney.

In her prepared speech, she talked about the lessons the RBA had learned from using unorthodox policies during the pandemic.

She said the RBA's extraordinary bond buying program had resulted in the bank holding around $356 billion in Australian government bonds and state government bonds by the end of June this year (see the graph below).

She said the bond buying program and other policies had broadly achieved their aim, helping to support the economy and employment through very uncertain times.

She said one outcome of the bond purchases had been that the bank would report a substantial accounting loss in its 2021/22 annual accounts, resulting in the bank being in a position of "negative equity."

However, she said people needn't worry about that because central banks are not like normal banks.

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She said there was no risk the RBA would become insolvent.

"If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern," she said.

"But central banks are not like commercial entities. Unlike a normal business, there are no going concern issues with a central bank in a country like Australia. Under the Reserve Bank Act, the government provides a guarantee against the liabilities of the Reserve Bank.

"Furthermore, since it has the ability to create money, the bank can continue to meet its obligations as they become due and so it is not insolvent.

"The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job," she said.

She said the RBA thought it was still prudent to return to positive equity at some point in the future, and it would get there eventually.

"Despite the fact that the bank can continue to operate with negative equity, the board’s view is that it is important that the bank return to positive equity over time," she said.

"The board has communicated this to the government. While it has not sought a capital injection, the board has indicated to the government that it expects that future profits will be retained by the bank until the bank’s capital is restored.

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"The treasurer has endorsed this general approach, noting that under the Reserve Bank Act the issue of distributions to the government is considered each year," she said.

She also said people should understand that the $356 billion in Australian government bonds held on the RBA's balance sheet were actually liabilities issued by the federal government.

"So, while the bank will report a large valuation loss in 2021/22, the government's debt issuer – the Australian Office of Financial Management (AOFM) – will report a significant valuation gain," she said.

"For the whole of government, therefore, the bank's loss on this part of its portfolio will net off against the AOFM's gain."

She said that interaction between the AOFM and the RBA underpinned the money creation that supported the economy through the pandemic.

"We can create money," she said during the Q&A. "That's what we did when we bought the bonds. We created money and bought the bonds.

[NSXCIGAR]

Inflation is always and everywhere a monetary phenomenon - Milton Friedman, 1963.

[HarveyBoulevard]

It will just be transitory...don't worry.

[cnov]

If only there were some sort of currency that was outside the control of government whim and tomfoolery.

[SCgarman]

43 minutes ago, HarveyBoulevard said:

It will just be transitory...don't worry.

So they said, so they continued to print more. 4 trillion in less than 2 years? C'mon Nov.8

[Nevrknow]

What kills me is the entire lack of common sense EVERYWHERE. Would anyone apply  that logic to their household finances?

[anacostiakat]

HaHaha.  Some good lines here.  

[TheGipper]

31 minutes ago, BoliDan said:

Ah, the Zimbabwe approach. 

[Cigar-Therapy]

1 hour ago, Nevrknow said:

What kills me is the entire lack of common sense EVERYWHERE. Would anyone apply  that logic to their household finances?

Everywhere, every side, doesn’t matter whether a Dema-dont or a republi-cant… it’s maddening. 

[Corylax18]

4 hours ago, SCgarman said:

So they said, so they continued to print more. 4 trillion in less than 2 years? C'mon Nov.8

You think voting is going to solve the problem? I hope you plan to write in your own name. If either party wasn't an active, willing participant in the problem, it wouldn't be nearly as bad as it is. "Buying Votes" is the new norm, Biden isn't the president that insisted his own signature grace several rounds of mostly unnecessary covid checks. 

 

5 hours ago, El Presidente said:

We can create money," she said during the Q&A. "That's what we did when we bought the bonds. We created money and bought the bonds."

It's worked absolutely flawlessly in the US and Europe over the last several years, consequence free too. Why shouldn't your pol's get some of the sugar rush too? Fair is fair. 

[rcarlson]

FFS.  Weimar.  

[Chibearsv]

3 hours ago, Nevrknow said:

What kills me is the entire lack of common sense EVERYWHERE. Would anyone apply  that logic to their household finances?

I'm not broke, there's still checks in the checkbook!  🤑

[Frinkiac7]

I can create money, too, and have tried, using post-it notes IOUs, but amazingly no one seems to want to accept them.

[DaBoot]

See can , kick can. Get paid by donors. Repay donors. Retire millionaire. Easy 1,2,3

[Puros Y Vino]

10 hours ago, cnov said:

If only there were some sort of currency that was outside the control of government whim and tomfoolery.

Have you heard about Cryptocurrency?  😁

[ltte]

Already seen here in years 1990.

"In November 1993, the government delayed turning on the heat in government-owned apartment buildings in order to save money, so the buildings’ tenants bought inefficient space heaters which overloaded the electrical system leading to blackouts. Pensioners and other Yugoslavs delayed making payments for government services, knowing that even a few days’ delay would wipe out the cost of making any payments. In short, the economy collapsed. As the inflation got worse, businesses began using Deutsche Marks instead of Yugoslav Dinars to avoid losing money from the continual erosion in the value of the Dinar.

To keep up with the inflation, Yugoslavia had to continually issue new currencies to get rid of the zeroes that were piling up. On January 1, 1990, a new Dinar replaced the old Dinar at the rate of 10,000 to 1, in July 1992 another Dinar was introduced at the rate of 10 to 1, and in October 1993 another new Dinar was introduced at the rate of 1 million old Dinar to 1 new Dinar. In January 1994 the 1994 Dinar was introduced at the rate of 1 billion 1993 Dinar to 1 1994 Dinar, which was replaced in turn by the Super Dinar at the rate of 12,500,000 to 1 in less than a month.

In one year, between December 1992 and December 1993, the effective exchange rate between the Yugoslav Dinar and the US Dollar had gone from 900 Dinars to the US Dollar to 3 billion million million Dinars (3 sextillion for anyone who cares) to the US Dollar.

In February 1994, 1 new Super Dinar was equivalent to 1.2 Octillion (1.2 billion billion billion, i.e. 27 zeroes) Dinars from 1989."

It started as a country cash flow problem and escalate to the roof. 

Ltte