Put Phil Lowe on JobKeeper

The RBA’s job is done, according to Phil Lowe:

I would now like to address one idea for the use of the central bank’s balance sheet that I sometimes hear – that is, we should use it to create money to finance the government. A variant on this idea is that the central bank should just deposit money in every bank account in the country – this is sometimes known as ‘helicopter money’ because, before we had an electronic payments system the idea was that banknotes could simply be dropped by helicopter.

For some, this idea is seen as a way of avoiding financing constraints – it is seen as holding out the offer of a free lunch of sorts. The central bank, unlike any other institution, is able to create money and the resource cost of creating that money is negligible. So the argument goes, if the government needs money to stimulate the economy, the central bank should simply create it in the public interest.

The reality, though, is there is no free lunch. The tab always has to be paid and it is paid out of taxes and government revenues in one form or another. I would like to explain why.

I will start with some central bank accounting. When a central bank creates money to finance government spending it does so by crediting the government’s deposit account with it. These extra deposits represent a liability of the central bank. And on the asset side of the balance sheet, the central bank might have an IOU from the government to be paid in the future.

Now suppose that the additional government spending is successful in stimulating the economy and this starts to push inflation up. At some point, interest rates would need to be increased to avoid inflation rising too far. If this lift in interest rates did not occur, inflation would rise, perhaps to a very high level. In this case, it would be through the inflation tax that the community pays for the extra government spending. So there is no free lunch – the spending is just paid for in a different way.

Now instead suppose that interest rates are increased to avoid high inflation successfully. Even then, there is still no free lunch. How the tab is paid though depends on the nature of the arrangements that are in place.

One possibility would be for the government to pay back the IOU along with any accumulated interest at some point down the track. This repayment would need to be funded by future taxes.

If instead the IOU was not interest-bearing and was not repaid, the central bank would start accumulating losses as the interest rate it paid on its deposit liabilities increased and there was no offsetting income. This would lead to a decline in dividends to the government and possibly a future recapitalisation of the central bank. Both have to be funded through tax revenue.

Another possibility would be to increase the general level of interest rates to deal with inflation, but to maintain the low interest rate on deposit balances held at the central bank. This approach would limit losses at the central bank even if the IOU was not interest bearing. But it would effectively amount to a tax on the banking system, as it is the banks that would hold these low-interest balances once the government has spent the money. In this case, it is this tax that would help finance the extra spending.

The message here is that somebody always pays. It certainly is possible for the central bank to change when and how the spending is paid for, but it is not possible to put aside the government’s budget constraint permanently. Where countries have, in the past, sought to put aside this constraint the result has been high inflation.

Notwithstanding this historical experience, some prominent mainstream economists, including Stanley Fischer, a former governor of the Bank of Israel and Vice Chair of the US Federal Reserve, have recently argued that central bank financing of government spending may be appropriate in some circumstances.[2]

In particular, they have focused on the situation in which:

  • conventional monetary policy options have been exhausted
  • the central bank is falling short of its goals, and crucially
  • public debt is high and the government cannot borrow in financial markets on reasonable terms.

They argue that under these particular circumstances, central bank financing may be welfare enhancing, provided that there are strong safeguards to avoid the inflation problem.

The main safeguard proposed is that the amount of monetary financing and the conditions under which it is provided, are determined solely by the independent central bank, not by the government. It is envisaged that the central bank provides finance up until the point that its goals for inflation and perhaps unemployment are met. Importantly, the government would continue to determine how the financing is spent. This idea has attracted a lot of attention recently, although many commentators have pointed out that there are likely to be very significant challenges in maintaining this type of safeguard over time.

It is worth repeating that this proposal is only relevant to the situation where high government debt constrains the ability of the government to provide necessary fiscal stimulus financed through the normal channels. Clearly, it is not relevant to the situation we face in Australia.

So I want to make it very clear that monetary financing of fiscal policy is not an option under consideration in Australia, nor does it need to be. The Australian Government is able to finance itself in the bond market, and it can do so on very favourable terms. There is strong demand for government debt and the Australian government can borrow for five years at just 0.4 per cent and for ten years at just 0.9 per cent (Graph 7). These are the lowest borrowing costs since Federation.While monetary financing is not an option in Australia, the Reserve Bank Board continues to review overseas experience with other monetary options. We had another discussion on this at our meeting two weeks ago.

Central banks around the world have all moved in the same general direction, but they have configured their monetary support packages differently. Using international experience as a guide, it would have been possible to configure the existing elements of the RBA package differently. For example, the various interest rates currently at 25 basis points could have been set lower, at say 10 basis points. It would also have been possible to introduce a program of government bond purchases beyond that required to achieve the 3-year yield target. Different parameters could have also been chosen for the Term Funding Facility.

After discussing these possibilities, the Board concluded that that there was no need to adjust our package of measures in the current environment. The Board has, however, not ruled out future changes to the configuration of this package if developments in Australia and overseas warrant doing so.

At our meeting, we also reviewed some alternative monetary policy options.[3]

One of these is negative interest rates.

There has been no change to the Board’s view that negative interest rates in Australia are extraordinarily unlikely. Our reading of the international evidence is that the main potential benefit from negative rates is downward pressure on the exchange rate. But negative interest rates come with costs too. They can cause stresses in the financial system that are unhelpful for the supply of credit. They can also encourage people to save more, rather than spend more, so they can be counter-productive from that perspective too. So this is not a direction we need to head in.

Another monetary option that has been used elsewhere is to intervene in the foreign exchange market. The evidence here is that when the exchange rate is broadly in line with its economic fundamentals, as the Australian dollar is currently, this approach has limited effectiveness. It can also involve substantial financial risks to the public balance sheet and complicate international relationships. So this too is not a direction we need to head in.

The conclusion of our discussions at the July Board meeting was that the best course of action is to maintain the mid-March package and to continue to monitor the effects of the pandemic on the economy. The Board has not ruled out future changes to this package, though it recognises that, in the current environment, there are limitations to what more can be achieved through monetary policy.

Given these limitations, and the outlook for the labour market, there is an important ongoing role for fiscal policy and use of the government’s balance sheet. I would now like to turn to this issue.

In one sense this speech is useful. It shows that monetary policy innovation to aid recovery is very possible. All Lowe does is explore who will be the winners and losers in each apparoach. This makes monetary innovation a political question and debate.

Yet, in another way, this speech is shockingly obtuse. How can Dr Lowe see no benefit in policy innovation (like but not exclusively MMT) that lifts inflation and interest rates? Dr Lowe faces rampant deflation and his job is to turn that into 2% plus so why would he not welcome new tools that can get him there? On the second, why wouldn’t Phil Lowe want higher interest rates for the world? That is a prerequisite to restoring capitalism by giving it back a price of capital. The great bubble manager appears to fear the very outcome he is employed to produce.

The unfortunate corollary of these two howlers is that Phil Lowe has dispensed with every possible new tool that the RBA might develop for further stimulus. With the real unemployment rate sitting somewhere above 15% and inflation cratered to unknown depths in the abyssal of the output gap, the RBA has put the cue in the rack. Bravo, eh. Pip, pip!

Iposo facto, it’s time we furlough the RBA. We’ll have to wait years longer than we need to for an economic rebound so we don’t need it over that period.  Indeed, the RBA’s absence will be more inflationary than its presence given we won’t have a #%$& talking up the currency at every opportunity.

The RBA has cut interest rates from 0.75% to 0.25% so its turnover has fallen enough to qualify for JobKeeper.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. His understanding of MMT is flimsy. His ramblings seem to be tethered to some kind of university first year economics learnings from the 70s.

    He has no idea what to to do and has not for several years. This is evidenced by his relentless calls to pass his accountability to the government and advocate for some kind of fiscal stimulus which he’s never really described exactly but has been harping on about for the last three years.

    He leads a board of overpaid oxygen thieves that have only ideas about keeping real estate prices from falling.

    In reality though, if he retired, he’d be replaced by that old peroxide boy haircut woman obsessed with RE.

    • +1

      “The message here is that somebody always pays.”

      Somebody always pays the RBA, but who does the RBA pay?

    • Pfh007.MEMBER

      Phil has a privatised public monetary system to protect from democracy and some very powerful stakeholders in that system watching very closely.

      That is his mission and if his explanations don’t make sense that is a small price to pay.


      • Pay a man a million, then that’s exactly how he’ll behave. Upton Sinclair’s aphorism will never grow old.

      • @Pfh007 you are right “privatised public monetary system” this is the key.

        This mechanism is not going away, the only question is who you want in charge of it. A group who are democratically accountable (which is what is written on the box) or “markets” which just means the influencers with the biggest swinging d**ks at any given time. We need the swing back to democracy, it is long overdue.

    • “He leads a board of overpaid oxygen thieves that have only ideas about keeping real estate prices from falling.”

      You got that bit right.

    • Right. So what do you propose the RBA should do, under the options he outlined, and why?

      • Fiscal policy from Govt balance sheet…until it runs out…then fiscal policy via Central bank balance sheet/money creation.
        Philly was just outlining the plan A and the back-up plan B.

    • Give him a go, just whittered on harmlessly. Did NOT to we the public, say, what are you whining about? Interest rates never been lower, get out and buy houses. Never been easier. Geeeeeez.

  2. As someone said in Afternoon links, I think we are facing Stagflation. It appears certain goods are going up in value whilst every day living expenses increase and everything else goes backwards or stagnates including wages and the jobs market. Yippie.

    • Welcome back 1989s stagflation

      Higher inflation high unemployment with higher interest rates

      Stagflation is the worst

    • Ronin8317MEMBER

      Stagflation in the 70s was caused by rising wages. Currently, the decrease in rent alone will be enough to make the CPI negative.

      • The CPI is irrelevant – it is merely an artificial construct that can be (and is) manipulated frequently. What matters is how much new money is being created.

        • ErmingtonPlumbingMEMBER

          Isn’t the “price” of new money Creation, hell the value of money itself!, an artificial construct?

          • Indeed, Ermo. That’s why I’m a gold advocate – gold is money. Everything else is credit.

            There’s nothing artificial about gold – it is no one’s liability and Govts can’t fix it’s price. There is no greater threat to gubbermints than citizens rejecting the artificial paper shyte the authorities insist is ‘money’ and turning to crypto and precious metals (or sea shells, dog forbid).

    • Jumping jack flash

      I used to think that but no so much now.
      Our economy simply cant support stagflation, and there needs to be capacity. All our capacity has been soaked up by debt.

      What we are facing, and seem to be in the midst of, is massive, massive debt deflation. We must have already had our minsky moment earlier. Maybe some time after 2017?

      Our debt went from 2.4 trillion to 2.1 trillion in Feb to 1.8 trillion now. If that’s not debt deflation i dont know what is.

      With that much deflation any attempts at stagflation will be quashed pretty quickly as living standards collapse.

  3. Genuine question. Which inflation (deflation) we are talking about CPI, wage, assets,credit or some other inflation?

    • To keep it simple

      It’s now needs versus wants

      Needs are going up in price wants down

      Gav is right, we are facing stagflation similar to 1980s vvvvv high unemployment high inflation higher interest rates

      Food energy heating up in price any asset that is exposed to debt is going to decline

      Good call Gav the old stagflation

      Inflation is on its way back ouch

      Anyone over 50 would remember stagflation it’s brutal

      • Mining BoganMEMBER

        The only surprising thing is that stagflation hasn’t been part of the conversation for a while.

        Guess it’s like everything, people expected it but got sick and tired of waiting for it.

      • @Bcn not necessarily my call, just listening to a few people before this crisis and after and my own observations. I know Warren Buffet is sitting out of this in cash (prepared to look stupid he says) in the short term until he knows what he’s dealing with.

        Wise man who doesn’t let ego make decisions. I tend to think he is right, maybe we won’t have technical Stagflation and maybe this is just a pocket of it. But so far it looks to be heading that way atm.

    • I’m a simple soul. So let’s not faff about with technical definitions of in- de- disin- stag- and other types of -flations.

      How about you just give me some examples to help me out- say a dozen things that this massive deflation has deflated (which the RBA can be blamed for).

      • Using my Bunnings receipts for the last few years as a yardstick, all I can see is inflation, and quite a lot of it (around 10% per annum in some cases). And houses around here all up 20% in the last few years. Petrol down a little. All in all, I don’t feel we are in a deflationary period.

        • ErmingtonPlumbingMEMBER

          Inflation in Bunnings prices is partly due to their harvesting the results of their monopolistic behaviour in crushing competition.
          Once the competition was crushed did you really think their prices were going to stay low?

          • Yeah they forced Masters out and now own the market Amazon / Walmart style. I’m just glad their UK takeover failed. The Brits clearly don’t like enough Sausage.

          • “Low prices are just the beginning” – I respect both their honesty and ability to plan long term.

      • I’ve been asking this same question for some time — I seriously can’t wait for all this deflation that’s coming because it just means my salary will stretch further i.e. buy more goods.

        Meaning, my standard of living is about to improve immeasurably …

          • Not sure if you’re being sarcastic…? I think you are. If that’s the approach you take, then why the hell would any variety of -flation matter?

            Inflation: wages rise but not as fast as the price of goods/services.

            Deflation: wages fall, faster than the price of good services.

            Why get worked up about the flavour of the flation then? Outcome seems to be the exactly same.

        • Jumping jack flash

          I don’t know if it works exactly like that but for people in stable and useful employment then maybe it will be ok

          I think there will be a great middle-class purge. Maybe not right away, because they are the ones who hold all the precious debt. There’s a lot of people who earn a lot of money, comparitively, who do very little by way of useful activities.

          • I was being sarcastic — there won’t be any deflation and if there is it’ll be in asset prices i.e. where the leverage is.

            Consumer goods (all the ‘needs’) are going higher. End of story.

    • My take is that we have inflation in quality assets. Deflation in low quality ones. I think overall living expenses are increasing, electricity, gas, and other essentials like water / council rates etc.. groceries are up probably due in part to demand but also supply shocks from the Rona.

      Certain stocks are up higher than before Rona (NASDAQ ex.)

      Wages are being slashed just to keep jobs, so the plebs are going backwards, especially if they don’t have quality assets in their portfolio or hold a lot of fiat.

      I know a lot of folks may have been waiting on the sidelines to scoop up assets on the cheap during the next big crisis (from 2015-2019) I was 1 of them. But now I’m thinking holding large amounts of fiat is a bad idea. Especially while those central banks print like crazy.

      • drsmithyMEMBER

        My take is that we have inflation in quality assets.

        Sorry Gav, I’d have to argue that collectable cars aren’t “quality assets”. Similarly artwork which I’m going to take a punt is also inflating through the roof.

        • Well depends on your view of the world. But there are certain blue chip cars I’d rather own then a lot of real estate.

          The biggest negative of art work and cars is they don’t produce cash flow. So I guess from that perspective I would agree.

          A business with good cash flow that is not impacted by Covid-19 is what I’d want right now. So perhaps food supply (like a farm) etc.. is a good bet.

          • drsmithyMEMBER

            Well depends on your view of the world. But there are certain blue chip cars I’d rather own then a lot of real estate.

            Sure, but is that because you want to use them in some unique way as a car, or because you think someone else will want to buy it off you for more in the future (ie: the greater fool theory) ?

            The biggest negative of art work and cars is they don’t produce cash flow. So I guess from that perspective I would agree.

            The other point is they don’t do anything useful or productive (cars are obviously potentially more useful than paintings, but there’s next to nothing an old car does that a new car doesn’t do better and cheaper).

            A business with good cash flow that is not impacted by Covid-19 is what I’d want right now. So perhaps food supply (like a farm) etc.. is a good bet.


          • I’ll just caveat and say, cars can generate income via promotional purposes. Eg: split screen Kombi used as coffee shop or vintage cars used in film, wedding cars, or other events etc.. so perhaps more useful than art from that perspective. Otherwise I’d agree.

            I tend to view these assets as a hedge against inflation like Gold or Real Estate (can be).

    • I agree with bcn about needs being more expensive.
      I’m the family food shopper, and vegetables seem to have vastly increased in price
      – there are some really cheap ,loss leaders ,I suspect, such as potatoes and onions.
      – very expensive items $7 for a small half head of cauliflower, which is pretty extreordinary( they are in season).
      – same price, but a 1/3 of the quantity( spinach).
      There’s not a lot of competition to the duopoly which probably doesn’t help.
      But that is vastly more expensive than a year ago.
      And yes, that’s trivial stuff, but we all have to eat, and it’s getting steadily more expensive.

  4. happy valleyMEMBER

    ” … why wouldn’t Phil Lowe want higher interest rates for the world?”

    Because he loves asset price bubbles, massive household debt (that would otherwise be unaffordable) and borrowers and hates savers and depositors?

  5. http://www.afr.com/business/banking-and-finance/asic-won-t-appeal-westpac-shiraz-and-wagyu-case-20200721-p55e3g?btis

    Hey that’s a bit unfair to Phil, old mate has been busy trying to reflate bubbles and kneecapping responsible lending by banks:
    It is understood RBA governor Philip Lowe and Treasury secretary Steven Kennedy cautioned ASIC chairman James Shipton that an appeal to the High Court could dampen lending by banks and undermine the economic recovery during COVID-19.

  6. Pfh007.MEMBER

    RBA Watch: The Lowe Down on Magic Money


    It had to happen.

    Once Alan Kohler was talking up the wonders of Magic Money on national television, it was only a matter of time before the RBA would strike back….hard. After all the RBA has a state / private bank monetary cartel and the interests of very large wealthy corporate stakeholders to defend.

    Sith Lord Governor Philip Lowe chose the annual Anika foundation speech as the opportunity to instruct the assembled young banking industry Padawans on the importance of remaining loyal to the dark side of the monetary force.

  7. The banks benefit hugely by being the primary creators of money. However, the money created by banks is all in the form of debt with an attached interest component. That means that the amount of debt must always increase if there is to be anyway to pay back the interest. The problem with ever increasing debt is the only way to do it is to have ever increasing inflation and when required shrinking interest rates. The problem the world is now in is that inflation has largely stalled with wages not increasing and interest rates have hit zero or even negative in the loopy eurozone. If governments injected money into the economy without an attached interest burden they could fix this, but modern economies and governments are largely controlled by financial interests so the resistance would be astronomical.

    • Interest free debt created by the govt? Wasn’t the outcome of this covered here:

      “If instead the IOU was not interest-bearing and was not repaid, the central bank would start accumulating losses as the interest rate it paid on its deposit liabilities increased and there was no offsetting income. This would lead to a decline in dividends to the government and possibly a future recapitalisation of the central bank. Both have to be funded through tax revenue.”

      • To me this is why Phil is acting like Australia’s chief accountant not an economist. In the great corporation of Australia.

        I understand that the unique privilege to create money means the central bank does not have to balance the books as such. Who is going to call in the debt of the central bank? Maybe Pfh can interject but only foreign lenders could call their bluff but not directly. The USA is the only entity that is truly unconstrained in this regard as the producer of the world’s reserve currency.

        I understand Lowe’s comments as more a “yes” we could technically do this but we are worried about a loss of control and unleashing forces (domestic inflation or issues with the currency) that we might not be able to stop once the genie is out of the bottle. The “somebody always pays” is lie and a smokescreen.

        The RBA calls this sound management; their stakeholders call it maintaining their interests and the status quo; citizens call it holding onto the life ring while we drown – in case you might need to use it in an emergency! Raising rates is normal practice for a central bank, they know this means turfing people out of work as a matter of routine. If they are not kept democratically accountable they are not squeamish about human suffering by nature. They need to be kept accountable.

        • “I understand Lowe’s comments as more a “yes” we could technically do this but we are worried about a loss of control and unleashing forces (domestic inflation or issues with the currency) that we might not be able to stop once the genie is out of the bottle. The “somebody always pays” is lie and a smokescreen.”

          Your second sentence contradicts your first. If the first sentence was realised, why would you then say the ‘somebody always pays’ is a lie? Obviously in that case the whole country could, in an extreme case, be fundamentally bankrupt and the $AUD finished.

          • Because the negatives only appear if it does actually get out of control. In the case of inflation you would imagine the RBA has some experience in this area? It is just another tool and if they see inflation ticking up via this mechanism they can adjust it just like they do interest rates. You can understand their lack of confidence (check out the voodoo in calculating the Non-Accelerating Inflation Rate of Unemployment (NAIRU) from a recent L. Ellis speech on the RBA website) but it is not an on/off switch as Lowe implies. It is graduated. If the negatives don’t appear then really… as I understand it… nobody pays.

          • Fair comment. I do agree he tends to be using some worst case lower probability scenarios to scare everyone off from thinking about the idea again i.e. he is presenting a false binary of no MMT or all-in MMT.

            But as you say, you can still pursue these MMT options with large moderation and just deal with the associated, manageable fallback, with the intent/hope that it achieves the objective. If not, the blowback is manageable.

            It all feels very political and risk adverse from him overall that he doesn’t want to risk the RBA’s reputation.

    • Jumping jack flash

      QE and UBI or negative interest rates would certainly fix this quandary. Both are largely equivalent, but sadly our god-king Phil has ruled both out.

      All we have now are a heap of banks not lending and everyone else paying back their debt which sucks all the capacity from the economy. It always would have. The reason we didnt notice was because the debt was growing, not growing fast enough, but still growing and offsetting the net drain of the nonproductive debt’s interest.

  8. It’s irrelevant what Lowe wants — he’ll be dragged kicking and screaming into funding Govt deficits whatever he says now.

    The Fed is in charge of global monetary policy. End of.

  9. The RBA needs to go before the Senate to justify its role and resourcing. What the RBA proposition is that it only wants to consider 1 tool, rates, that it typically never uses, it ignores its inflation goal and its economic stability role has been terrible due to blowing the debt bubble.
    Why shouldn’t the funding be cut by say 66 percent?

    • Honestly the entire banking system should have a royal commission to get to the bottom of what’s wrong, that’d sort things out. Oh wait…

  10. Interestingly Lowe talks about expanding the balance sheet in the context of an economy operating at full employment; ie a classical economy argument. But if the economy is operating in a liquidity trap, then you don’t necessarily get the inflation (at least not for a long time) and monetary expansion through fiscal policy can be supportive.

    This is just another straw man from a guy whose consistently called things badly.

    If Lowe were tripped up on the street by the truth, he’d get up, dust himself off, and walk on as if nothing has happened…

  11. Incredible that perhaps the most important public servant in the country, would get up and simply lie in our faces