In the wake of the $A60 billion bungle, the Australian government has turned its attention to creating smokescreens. Yesterday (May 25, 2020), the Treasurer released a statement – Temporary changes to continuous disclosure provisions for companies and officers – which effectively allows corporations to withold information from the public and investors about the state of their company finances. It will now be very hard to prove that company directors have mislead their investors. This is one of those thin end of the wedge trends that the Government has introduced under its emergency powers. For some time, the business peak bodies have been demanding the Government limit the capacity of shareholders to engage in class actions and for workers to pursue actions under industrial relations legislation (for example, QANTAS staff who have considered a class action against unsafe working conditions). But the point is that these diversions, which may or may not linger after the so-called 6-month sunset clause, take the pressure of the Government for their inept economic management, which is responsible for more than 2.4 million Australians (over 24 per cent of available workers) idle in one way or another. And when the question of economic management is raised we get a litany of lies reinforcing the fictional world that mainstream economists have created to prevent people from really understanding what the currency-issuing, Australian government can and cannot do. Today, I present some data on the RBA bond buying program and the way it is dovetailing with the debt-issuance activities of the Australian Office of Financial Management (AOFM). The Treasurer is in the National Press Club today and will spend his time lying about saving taxpayers’ money and reducing the debt burden for our grandchildren. Meanwhile 2.4 million Australians need more work.
The Signal interview
I did an interview for the ABC program, The Signal – Meet the economists denying debt – over the weekend.
The interview lasted 75 odd minutes and they did a fairly good job of distilling things down to a 17 minute segment.
The title of their program this week is unfortunate but I have no control over that nor the editing of the segment.
But it is good that this team is willing to run against the mainstream tide within the ABC and offer their audience some diversity.
The Treasurer’s story doesn’t align with what his own Department is saying
One of the ruses the Treasurer is using to cover the incompetence of the forecasting error is that it is actually good news because it means that the economy is doing better than they initially thought.
He repeated that claim in almost every interview he has done since Friday.
For example, he told the ABC News Breakfast Program yesterday (May 25, 2020):
But as you know, we had great success in flattening out the curve and we went from having a rise in the number of daily cases at 22 per cent in the week leading up to the announcement of the JobKeeper program, to now having 35 days straight where the number of new cases has increased by less than half a percent per day. So that health miracle has had a real economic benefit, hence the lower number of people who are going to be using the JobKeeper program as a result.
So why did the Treasury release last Friday (May 22, 2020) – JobKeeper update – say that:
Treasury’s overall view of the labour market is unaffected by this reporting error … It remains the case that in the absence of the JobKeeper program, Treasury expects the unemployment rate would have been around 5 percentage points higher. Treasury continues to expect the unemployment rate to reach around 10 per cent, although as indicated by last week’s Labour Force survey, the measured level of the unemployment is highly uncertain given the impact of social distancing restrictions on the participation rate.
The two statements don’t add up.
Which goes to the heart of what I wrote back on April 29, 2020 – JobKeeper wage subsidy – some strange arithmetic is afoot.
The aim of the JobKeeper wage subsidy was to keep people from losing jobs and entering unemployment.
5 percentage points of ‘saved’ unemployment is about 685 thousand jobs. Nothing like 6 million or 3 million (now after the error).
But the point is that if the Treasury’s estimates of “the labour market is unaffected by this reporting error” is unchanged, it means that the economy is doing no better than they originally thought.
Which means the Treasurer’s claims are inconsistent with the public claims of his own department.
Further, if the Treasury still believe the difference between the policy being there or not is that “the unemployment rate would have been around 5 percentage points higher” without it, and, that assessment is unchanged, then once again the Treasurer’s conclusions do not make sense.
The fact is that the whole JobKeeper arithmetic and related statements do not add up and are mutually inconsistent.
The lie about national saving
The Treasurer has also made claims that the fact that the Government is now going to spend $A60 billion less than planned means he is ‘saving’ money and reducing the debt burden, which means they have more capacity to deal with future calamities than they would have had had the 60 billion been spent.
Tortured, wrong logic.
A currency-issuing government does not ‘save’ when it doesn’t spend nor when it spends less than its withdraws from the monetary system via taxation and other currency drains.
Saving only is a meaningful term when applied to a currency-user like a household or a business firm.
For us, as users of the currency, we can expand our consumption possibilities next year by foregoing consumption now and earning an interest on the funds we hold back from consumption.
In other words, households (or users of the currency in general) are financially-constrained and have to earn income now, reducing prior saving, sell previously accumulated assets or borrow to fund spending.
Distributing that spending over multiple periods requires saving – because even though we can borrow in the short term on our credit cards – we have to eventually pay the debts back by running surpluses at some point.
That is the defining characteristic of a ‘spending unit’ that is financially constrained.
But it doesn’t apply to a currency-issuing government.
Their capacity to spend now, or tomorrow, or some later date is in no way financially constrained by what it did yesterday.
Running a fiscal surplus, may be appropriate under some limited and rarely seen circumstances, but it never provides the government with more capacity to run deficits now or later.
Currency-issuing governments do not have to forego consumption now (like a household) in order to spend more in the future, should that be appropriate.
It can type numbers into bank accounts whenever it chooses.
Note, I said that the government is in no way financially constrained by what it did yesterday.
That doesn’t mean that there is no path dependence in the way fiscal policy decisions taken now condition opportunities for government tomorrow.
Clearly, if a government has been running appropriately scaled deficits and achieving full employment and a consequence then it is ill-advised to suddenly expand its spending growth now unless it introduces offsets to reduce non-government spending.
Financially, it always can increase spending. But because spending always has to be calibrated against available real resources, past spending choices can impose constraints on future spending choices.
The RBA is buying up most of the debt issued
The Government has also been very quiet about the RBA’s newly-introduced bond-buying program.
The reason is obvious.
They don’t want the public to know that one arm of the currency-issuing government is accumulating a large proportion of the liabilities issued by another arm (Treasury) to match the rise in the fiscal deficit.
If they explained what was going on in the real world to the public, it would become very clear that the central bank is effectively ‘funding’ the deficits rather than any notion of some taxpayer account.
It would also disabuse the public of notions that such coordination between the central bank and the treasury, which is at the heart of the understanding you get from learning about Modern Monetary Theory (MMT), is dangerously inflationary.
Consider the data.
In their information sheet – Supporting the Economy and Financial System in Response to COVID-19 – the Reserve Bank of Australia outlines a number of policy innovations they are pursuing to help protect the economy and the financial system.
Among these measures they write:
Provide Liquidity to the Government Bond Market
The Reserve Bank stands ready to purchase Australian Government bonds and semi-government securities in the secondary market to support its smooth functioning. The government bond market is a key market for the Australian financial system, because government bonds provide the pricing benchmark for many financial assets. The Bank is working in close cooperation with the AOFM.
You can also view their more detailed explanation of what they are doing in this regard at – Reserve Bank Purchases of Government Securities.
Here is the list of the 169 – RITS Membership (Reserve Bank Information and Transfer System).
The RITS is “Australia’s high-value settlement system, which is used by banks and other approved institutions to settle their payment obligations on a real-time gross settlement (RTGS) basis.”
In other words, transactions across the financial system are settled by “the simultaneous crediting and debiting of Exchange Settlement Accounts (ESAs) held at the Reserve Bank of Australia”.
The ESAs are what we call ‘reserve accounts’ and function to allow these transfers to be made.
You find the daily data here – Long-dated Open Market Operations Results.
And complete data set is available via the RBA statistics – Monetary Policy Operations – Current – A3 – then go to the worksheet “Long-Dated Open Market Operations”.
What do we learn?
Since March 26, 2020, when the purchases began, the RBA has purchased a total of $A40,250 million worth of Australian government bonds (at varying maturities and yields).
The overall totals since March 26, 2020 are:
1. Australian government bonds $A40,250 million (100 per cent – see below).
2. NSW government debt $A2.634 million (88.2 per cent).
3. Victorian government debt $A2,361 million (90.5 per cent).
4. Queensland government debt $A2,707 million (88.5 per cent).
5. South Australian government debt $A695 million (82.2 per cent).
6. Western Australian government debt $A2,288 million (89.8 per cent).
7. Tasmanian government debt $A127 million (88.8 per cent).
8. Northern Territory government debt $A107 million (85.6 per cent).
9. Australian Capital Territory government debt $A179 million (99.4 per cent).
The percentage figures next to each entry indicate how much of the total RBA holdings of each jurisdiction’s debt has been purchased since March 26, 2020. In fact, the RBA has been purchasing State and Territory debt since April 10, 2014 according to this data.
Treasury Bond Issuance since March 30, 2020
The Australian Office of Financial Management (AOFM) is the Treasury body that handles all the Australian government debt.
It issues Treasury Bonds using two methods (Source):
1. Price auctions – the dominant method (80 per cent of funds raised) where a selected group of investors bid for the offering and the lowest yield (highest price) bids exhaust the pre-announced volume. The auctions are usually weekly.
The AOFM say that “financial intermediaries as bidders sell the bonds to investors and other market participants” in the secondary bond markets and they are then used as speculative assets.
2. Syndications – are controlled allocations where “the AOFM determines price, deal size and allocations”. They are infrequent and allow the AOFM to develop new maturities (where there is no current secondary market).
Since March 30, 2020, the AOFM has made two syndicated issues:
1. April 15, 2020 – $A13,000,000,000 (4-year bond, yield 0.47 per cent). The AOFM received bids of $A25.8 billion for this issue.
2. May 13, 2020 – $A19,000,000,000 (10-year bond, yield 1.025 per cent). The AOFM received bids of $A53.5 billion for this issue.
These two issues were the largest in the AOFM’s history.
The boss of the AOFM described the investors ‘rushing’ to get their hands on the Australian Treasury Bonds.
The following graph show the details of the Treasury Bond Issuance (via price tender) since March 30, 2020 (the first auctions after the RBA began its bond-buying program).
The blue bars are the actual issuance totals ($A) for various maturities and the red line represents the total bids at each auction for the maturity offered.
The ratio of the diamond to the bar (if we can call it that) is the bid-to-cover ratio, which mainstream observers claim reflects the strength of market sentiment.
The AOFM managed total issuance over this period of $A30,600,000,000.
The bid-to-cover ratio is just the the $ volume of the bids received to the total $ volumes desired. So if the government wanted to place $20 million of debt and there were bids of $40 million in the markets then the bid-to-cover ratio would be 2.
I wrote about bid-to-cover ratios in these blog posts (among others):
1. Britain confounding the macroeconomic textbooks – except one! (May 21, 2020).
2. Bid-to-cover ratios and MMT (March 27, 2019).
3. D for debt bomb; D for drivel (July 13, 2009).
Here is a graph of the coverage ratio for all the auctions since March 30, 2020 (for the various maturities on offer – see below).
What this data tells me is that there is a massive thirst among the bond dealers for Australian government Treasury Bonds. The coverage ratio is rarely below 4, which means that there are 4 times as much money being offered than the government bids for.
The coverage ratios vary but have averaged 3.45 since the AOFM started publishing data in this form from August 5, 1982.
And why wouldn’t that be the case?
The Treasury Bonds are risk free and with the RBA now operating in secondary markets buying up Treasury Bonds, investors know they can make a capital gain on any bonds they hold as a result of the RBA demand.
The Treasury bond issues vary across the maturity range (when the bonds have to be paid back) and the distribution and average weighted yields since March 30, 2020 are shown in the following table.
It is clear that the RBA has already purchased a significant proportion of the Treasury Bonds (in value) than have been issued by the AOFM via either method.
The current proportion is 63.8 per cent.
That proportion will rise over time.
It’s an uphill battle that is on-going trying to break down all these lies that the mainstream of my profession has injected into the public debate and which politicians use to defend nasty policies or incompetence execution of nasty policies.
We can only keep pushing! One step at a time.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.