Fake Government Debt in Australia

It's fake debt!

There need be no debt crisis from Australian Commonwealth government rescue packages legislated to sustain the economy during the economic crisis caused by the Corona virus health crisis and response because it is fake debt.

There are 7 principles to understand.

1. When a commercial bank lends money it creates the money out of nothing (DR Loan to Joe Bloggs, CR Joe Bloggs cheque account, no outside or additional funding needed to make the loan. When Joe spends the money then, unless Joe spends it with a customer of the same bank, the lending bank may have to borrow from the general money market). (See the confirming Bank of England paper here)

2. A commercial bank can buy a bond, by creating the money from nothing (Dr Asset: Bonds, CR Commonwealth Government Treasury).

3. If it so desires the Reserve Bank of Australia ("RBA") and Commonwealth Government ('the Government") acting in concert RBA can make it attractive for banks to buy bonds from the Government and then sell them to the RBA, either by simple suasion or by making regulations that banks have to hold reserve assets such as Government bonds or credits at the RBA

3. When the Reserve Bank of Australia buys something like Commonwealth Government debt (Commonwealth Government Bonds) from a commercial bank, it does not inject money into the real economy, it simply recognises that the bank has increased reserves at the RBA (DR Asset: Government Bonds, CR Commercial Bank (eg Westpac) Bank Reserves

4. The RBA does not have to pay interest on reserves (but in some circumstances the government may make it pay such interest)

5. When the RBA makes a profit eg from interest on Commonwealth Government bonds, it pays that profit to the Federal Government Treasury as a dividend.

6 . Effectively the Treasury funds the interest it credits to the RBA as holder of the bonds from the additional dividend it receives from the RBA's additional profit. It is what is commonly called a "round robin". The money ends up back where it started.

7. When commercial banks get no interest on reserves at the central bank, their returns on assets fall a little compared to just before they sold them, but their profit will go up slightly as they will sell the bond at a slightly lower yield than that at which they bought it, effectively taking a small fee for their trouble.

So all this debt can effectively be at no net cost to the government and never have to be repaid.

This all works because the Commonwealth Government is a monetary sovereign that created and controls the Australian dollar as a fiat currency, controls the banks and controls the reserve bank and owns and runs the Australian Government Treasury

This does not work for state governments as they do not issue and control their own currency, instead they use the Australian Government's currency. Also the state banks do not control the RBA or the Australian Treasury.

It does work for other countries which are monetary sovereigns and have similar structures and institutions to the Australian Government eg USA, UK, Japan, China.

It does not work for countries that have surrendered their monetary sovereignty to some higher (in relation to money) authority. Primarily that is the countries that use the Euro as they ahve agreed to be bound by European institutions and to use a currency that the country does not control, the Euro.

The government could do this with more debt, it is simply a matter of political will, but there are some real limitations. If the Government gives people too much spending power it can cause asset or general inflation (and eventually hyper inflation). If the Australian government does huge amounts and other nations do none, then the Australian Dollar ("AUD") will fall in value relative to other countries' currencies.