Banks net assets have not change (they bought new bonds from the treasury and sold existing bonds to the RBA - their ESA balance are unchanged) ...... The process goes on so long as the banks can sell eligible securities to the RBA in exchange for reserves. Given Bonds (irrespective of the rating) are eligible securities, the process can go on forever.
I don't think this is correct. The banks don't *sell* bonds/securities to the RBA - they may have used some as security for a *temporary* loan of reserve funds (via a repo, as described in the RBA speech I posted previously), acquired to deal with a short term need of reserve funds, which they will have subsequently repaid as/when the government reserves/cash was spent into the economy, thus replacing the reserves originally lost (in your scenario) due to the bond purchases.
Although I still argue that by law it's the other way around - government must sell the bonds first, then spend the funds.
Either way, in the end, no new reserves are created that I can see? I think Elastic's point about the USAs $14T deficit without $14T in extra reserves appearing also demostrates this to be the case.
I don't think this is correct. The banks don't *sell* bonds/securities to the RBA - they may have used some as security for a *temporary* loan of reserve funds (via a repo, as described in the RBA speech I posted previously), acquired to deal with a short term need of reserve funds, which they will have subsequently repaid as/when the government reserves/cash was spent into the economy, thus replacing the reserves originally lost (in your scenario) due to the bond purchases.
Although I still argue that by law it's the other way around - government must sell the bonds first, then spend the funds.
Either way, in the end, no new reserves are created that I can see? I think Elastic's point about the USAs $14T deficit without $14T in extra reserves appearing also demostrates this to be the case.
I have responded to your earlier post. Most of your issued above I have addressed.
So the private sector's net financial assets have increased by $50bn (Banks (0) + you (0) + Builders ($50bn)) They is exactly equal to the deficit of the government indirectly funded by new reserves from the RBA.
The process goes on so long as the banks can sell eligible securities to the RBA in exchange for reserves. Given Bonds (irrespective of the rating) are eligible securities, the process can go on forever.
Ok, I understand that there is an extra $50B of "financial assets"(in the form of bonds) in the private sector but there is no change in the amount of "money" in the private sector as a result of the government spending.
As a result, I think we can disregard any movements of money between the Reserve and other banks as overcomplicating things.
Theoretically, there is no difference, in terms of money creation, between state governnment debt, federal govt debt or me lending money to a mate as an IOU. i.e they all use existing money to buy the debt.
So, is it correct to say that it is only commercial banks that "create money" by the typical loan/deposit action?
Ok, I understand that there is an extra $50B of "financial assets"(in the form of bonds) in the private sector but there is no change in the amount of "money" in the private sector as a result of the government spending.
As a result, I think we can disregard any movements of money between the Reserve and other banks as overcomplicating things.
Theoretically, there is no difference, in terms of money creation, between state governnment debt, federal govt debt or me lending money to a mate as an IOU. i.e they all use existing money to buy the debt.
So, is it correct to say that it is only commercial banks that "create money" by the typical loan/deposit action?
No - like Sydneyite, you have made two critical (and not necessarily true) assumptions.
1. You are assuming a bond is not a financial asset. You are assuming owning a bond is not a form of savings. I would dispute that. 2. Even leaving that point aside, you are also assuming non-banks are the only buyer of the bond (in this case - you). To the extent banks buy the bonds, private sector cash / deposits increase by the same amount.
Two issues here; 1. Your analysis simply looks at cash balances. But private net financial asset have gone up by the value bond. A bond is a financial asset. No different to cash, but with a different maturity. 2. You have assumed 100% of the bonds have been purchased by non-banks. To the extent the Banks acquire the bonds, the private sector (non bank) deposits increase by the volume of bonds the banks buy.
So assuming the issue of $x bonds was bought 50% by banks and 50% by non banks the net result is Goverment RBA account = -X + X = 0 net change * Banks RBA/ESA/ asset account = +X - X + 0.5 bonds = 0 ESA balance + 0.5X bonds * Private deposit accounts = +X - 0.5X = 0.5x Deposits
The non-bank deposits (bank liability) is exactly offset by Bonds owned by the Banks (bank asset).
Firstly - yes I assumed 100% purchase of the government bonds by non-banks, trying to keep things simpler to understand. Re your bond as "money" point, it's an asset, sure. But we are discussing primarily what happens to reserve fund balances here when the goverment borrows to spend (runs a deficit), so the cash balances are what we want to look at. I ignores the net increase in assets of the holder of the bond, and I also ignored the liability the government has to replay the face value of thebond at maturity - these two cancel each other out.
Now, when it comes to banks purchasing the new bonds - they cannot use reserve funds directly to do this right? Don't they have to use equity? Ie in effect their "own" capital? So I don't seen any difference in this scenario compared to a private individual or institution/business etc buying the bonds. Just effects the banks assets/equity "mix of assets". Ie they sell some other security, receive cash, and use that to purchase the bond - all flows through their ESA just like if anyone else did it.
Finally, you have added the bond value to the banks ESA balance - I don't believe this is correct. The bond is now an asset on the banks balance sheet, but it is not reserve funding sitting in the ESA balance.
What you have shown though is perhaps how government "fully funded" deficit spending can be stimulatory, even though no new reserve funds / money are created. The private sector bank accounts still go up by "X", even though the non-bank sector only had $X/2 withdrawn in aggregate to fund the spending - with the other 50% coming from bank equity, which otherwise would have been sitting around in some other asset class?
EDIT: Just saw your other response to me - I don't think you have adressed the issue of the use of bonds by banks as security in repo agreements with the RBA to only temporarily "borrow" reserve funds, vs your original assertion that the RBA actually buys or sells bonds from/to the banks to provide reserve funds. I don't think the later is the case at all - unless it is done indirectly via a QE type process like the US has been running. I also don't think the day-day funding / cash rate mechanism matters in the "big picture" of what happens to aggregate reserve levels when a government borrows to spend.
No - like Sydneyite, you have made two critical (and not necessarily true) assumptions.
1. You are assuming a bond is not a financial asset. You are assuming owning a bond is not a form of savings. I would dispute that. 2. Even leaving that point aside, you are also assuming non-banks are the only buyer of the bond (in this case - you). To the extent banks buy the bonds, private sector cash / deposits increase by the same amount.
Please see my post to Sydneyite for the workings.
Are you saying that when a bank buys a government bond they use a different mechanism to that of a superannuation fund? I think we are both in agreement that government debt increases "net financial assets" in the private sector by the same amount as the debt. I just don't see how extra deposits can also be created by this mechanism. I just see it as recycling money through the system to provide stimulus. A deposit is replaced with a bond and spent by government and deposited back into someone's account.
Firstly - yes I assumed 100% purchase of the government bonds by non-banks, trying to keep things simpler to understand. Re your bond as "money" point, it's an asset, sure. But we are discussing primarily what happens to reserve fund balances here when the goverment borrows to spend (runs a deficit), so the cash balances are what we want to look at. I ignores the net increase in assets of the holder of the bond, and I also ignored the liability the government has to replay the face value of thebond at maturity - these two cancel each other out.
The question was whether government spending increases Banks reserves. The answer was yes. While the starting point here is not important (the system cycles the reserves) it is worth noting the Treasury always have a positive balance with the RBA ( you can see this on the RBA website http://www.rba.gov.au/statistics/tables/index.html (A1), which implies the spending generally comes first. And as a point of logic, a ticket master cannot collect tickets unless they issue the tickets first.
Quote:
Now, when it comes to banks purchasing the new bonds - they cannot use reserve funds directly to do this right? Don't they have to use equity?
No - they use their cash balance at the RBA to settle the bonds. On settlement, the bank ESA falls but is replace by a bond - dollar for dollar. The Cash at the RBA is transferred to Treasury
It has nothing to do with equity.
Quote:
Finally, you have added the bond value to the banks ESA balance - I don't believe this is correct. The bond is now an asset on the banks balance sheet, but it is not reserve funding sitting in the ESA balance.
Following on from what I just said, the banks have lost their ESA balances and now have a bond (asset swapped for asset). You are correct - a Bond does not qualify as an ESA balance. But the banks are now short reserves by exactly the amount of the bonds purchase. the RBA will provide new reserves (either via repo or loan), so that the reserve balance is replenished (unchanged).
Quote:
What you have shown though is perhaps how government "fully funded" deficit spending can be stimulatory, even though no new reserve funds / money are created. The private sector bank accounts still go up by "X", even though the non-bank sector only had $X/2 withdrawn in aggregate to fund the spending - with the other 50% coming from bank equity, which otherwise would have been sitting around in some other asset class?
What I have shown is net government spending adds to the net financial assets of the private sector (inclusive of bonds). The composition of these financial assets (bonds or cash) depends on the extent the banks participate in the bond auction. This has been my position since I joined the forum 4 year ago, and it has not changed.
I Must go - I have enjoyed the discussion. Thankyou for being civil.
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