Australia Begins Monetary Easing, Money Supply Explodes

Since the corona crisis, central banks have been buying government bonds and other debt securities on a large scale again. In their own words, to keep interest rates low. Australia is also participating in this madness, because its monetary base has doubled in a year. The central bank bought over $100 billion government bonds. As a result of the bond-buying program, the central bank already has 15% of the country's total public debt on its balance sheet.

Due to the corona crisis, many governments have taken fiscal stimulus measures to support the economy. As a result, public debts worldwide have risen sharply. To foot that bill, central banks are trying to support the bond market. They are not allowed to lend money directly to governments, but they can buy government bonds through the secondary market. In doing so, they try to convince the market that interest rates will remain low, so that governments can borrow at a lower interest rate.

Monetary base more than doubled in Australia (Source: RBA)

Why QE is not the same as printing money

However, the central bank's purchase of government bonds is not the same as printing money. Banks sell government bonds to the central bank and in return receive a claim on the central bank. The balance sheet total of the central bank is therefore increasing, but that of commercial banks is not. There is also no more money in circulation as a result of the purchase of government bonds. There is only an asset swap, with which the central bank effectively takes over risk from banks. The same happens when, for example, the central bank withdraws mortgage loans or corporate bonds from the market and adds them to its balance sheet.

The increase in the money supply is thus limited to an increase in the monetary base, the part of the money supply that is put into circulation by central banks. Consumers and businesses in the real economy do not see any of this. Buying government bonds only has an indirect effect on the money supply. Because it pushes interest rates down, it can encourage people to borrow more money. As a result, more money comes into circulation, because banks create new money as soon as they grant credit.

To further encourage credit creation, the Australian government decided last year to further strengthen its legislation on credit conditions. Easing. These rules were tightened after the 2008 financial crisis to prevent people from getting too deeply into debt. The government is now reversing these strict regulations, because it would restrict lending by banks too much. This means that the risk of excessive lending and, in the long term, a new credit crisis is lurking again. It seems as if we have learned nothing from the previous crisis.

This contribution was made from Geotrendlines