The banks have $178 billion sitting on deposit with the Reserve Bank, earning zero interest. It was $155 billion a month ago. This is newly created money. In crude terms, the RBA is “printing” money hand over fist, but why are the banks not lending it? Why is there no nation-building infrastructure program like the US? Michael West investigates.
It was two years ago that Josh Frydenberg sallied forth with his maiden Budget. The Treasurer spoke proudly of the coming budget surplus and the Government’s fiscal rectitude. “Back in black”. A balanced budget. They got close that year, just a few hundred million short.
The fiscal rectitude came at a price though. Cutting spending cut growth and the Australian economy was deflating.
Now, two years down the track, ravaged by the pandemic, Australia now faces a budget deficit of $150 billion. It could be worse. We weathered the pandemic better than most, and commodity exports, principally the booming demand for iron ore from China, has buoyed the whole show..
Yet this is a K-shaped recovery; terrific for those riding the share market or the residential property boom; not nearly so wonderful for the rest, particularly for those on JobSeeker whose payments have been hacked back below the poverty line.
The design of the government’s pandemic response has a flaw; privatisation. The proceeds of the money-printing operation are not going to the government but to the banks. The QE program (Quantitative Easing, or creating new money) was designed to create new money for the banks so that they could lend it to business and revive the economy.
But the banks are parking it. There is $178 billion sitting on deposit at the RBA in exchange settlement accounts (ESAs), earning nothing. That’s higher than the projected Budget deficit of $150 billion.
How to make new money
- Treasury – the government – issues bonds (debt).
- The banks buy the bonds.
- The RBA buys the bonds from the banks, credits their accounts with new money.
And they are sitting on it and it’s growing at quite a clip, up $23 billion over the past month alone.
Meanwhile over the Pacific ocean, the Biden regime has just announced an ambitious $US2 trillion infrastructure program to reboot the US economy: roads, bridges, aged care, EV incentives, schools, broadband, and other infrastructure – and a hike to the corporate tax rate to fund it all.
The corporate tax proposal is problematic. We’ll get to that shortly. But the contrast could not be starker. A colossal nation-building initiative from the Yanks while the Aussies gave $178 billion to the banks and are now waiting for it to trickle down.
Why is it not trickling down, why are the banks not lending? They are lending – to big business and to residential property buyers – but they are not lending as the government designed it, to small business. In short, too risky, better to have the funds earning nothing on deposit at the Reserve Bank.
Matt Kean, the NSW minister for Energy and Environment, gave a hint or two on ABC Radio this morning when asked about who would decide whether to build or shut down coal plants. The decisions for that sort of thing would be made in Tokyo or Seoul, he said. Much of Australia’s infrastructure was controlled by multinationals and it is up to them whether to pull the plug on a coal plant, or not.
Indeed, Energy Australia is controlled in Hong Kong and London, via the British Virgin Islands,, much of the power grid in NSW, Victoria and South Australia is controlled in Singapore and China, as are a large chunk of our gas transmission networks. Our gas cartel of Exxon, BHP, Shell, Santos and Origin is largely foreign-owned, as are a good deal of our thermal coal companies.
The government and the RBA are playing a little charade at the moment, with the connivance of the financial press. They are pretending there is no money printing going on – as it has effectively been outsourced to the banks, privatised.
And so it is that they are all completely ignoring this lazy $178 billion, as if it doesn’t exist. The government could put it to good use, with the cooperation of the banks. They could come up with a nation-building program of their own, something to energise the economy, something more than a pastiche of public hand-outs such as JobKeeper to large companies, assorted airline subsidies, lax lending policies and watered down regulations.
They could set up an infrastructure fund and invite the banks to invest in it. Although that might require an ideological adjustment to the prevailing neo-liberal wisdom that the market knows best.
UBS economist George Tharenou now estimates the Budget deficit at $145 billion, that’s $54 billion better than MYEFO and $33 billion less than the cash parked on deposit. But it’s also pretty much down to luck, the luck of strong demand for iron ore and the billions in tax receipts, largely from BHP, Rio, Fortescue and Hancock Mining.
For its part, the RBA keeps prodding the Government; last month openly warning the Australian Council of Financial Regulators (APRA etc) about reining in new bank lending to households.
So leveraged are Australian households (so indebted compared with their disposable income) that a tick up in interest rates could be devastating. Consensus is that rates will stay at 0.1% for a year and any movement upwards will be foreshadowed early by the RBA, giving people plenty of warning for higher rates.
It has also noted the lack of “animal spirits” in the business community to borrow and invest – and the damage which could be wrought by cutting back stimulus too quickly.
So we have a two-speed economy, one of high under and unemployment, of some despair about the future and one for investors enjoying a big increase in paper wealth. It seems the Coalition government is content to allow this “wealth effect” to prevail as policy rather than anything of significant economic vision.
the Bank will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers.
In New Zealand, the central bank recently had its mandate extended to housing prices for the first time. It followed these remarks from the Finance Minister: “The Bank will have to take into account the Government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers”.
Don’t be surprised to see a move by regulators here to contain the housing bubble. They are likely to have to address it at some point. Meantime, there is the small matter of that lazy and a $178 billion … and just what to do with it. Surely, it is not just a capital buffer for the banks if the housing market gets nasty.
Joe Biden’s tax plan
To Joe Biden’s tax plan. This is the first significant tax hike in the US for decades. It is finally a recognition of the perverse allocation of resources which has so entrenched inequality in the US. Tax rates for wealthy will increase and the corporate tax rate is proposed to rise from 21% to my 28%.
This sounds huge and naturally Wall Street and corporate media are crying foul. The fact is however that it doesn’t matter much, as 28% of zero is the same as 21% of zero.
Enforcement is more important. Few multinationals pay 21% anyway. It’s a matter of what they can deduct, not the size of the rate. In Australia too, the business lobby routinely clamours for a lower corporate tax rate although most large corporations pay an effective rate closer to 10% than the statutory 30%. Exxon has paid zero tax for six years despite total income of more than $50 billion.
Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.