The RBA is not out of bullets, Rossco

Via Ross Gittins today:

But I’ve heard from a lot of retired central bankers who disapprove of the Reserve’s scraping of the barrel. And last week Dr Mike Keating, a former top econocrat, also questioned the wisdom of keeping on keeping on.

Some other people have seen the Reserve’s decision to, in Lowe’s words, “do what we reasonably can, with the tools that we have, to support the recovery” as a sign it judged last month’s budget not to have done enough.

…As Treasury Secretary Dr Steven Kennedy made clear last week, monetary policy’s “scope . . . to provide sufficient stimulus is limited and has necessitated the large levels of fiscal support”.

…the fact remains that the Reserve’s primary function – the short-term stabilisation of demand – has gone away and isn’t likely to come back in my lifetime (another 20 years, max). That is, its problem is structural (long-lasting) not cyclical (temporary).

Wrong, Rossco. The RBA has plenty more ammo and is getting more, not less relevant. The cash rate has ceased to matter but with mortgage rates still at 3% and fixed at 2% there’s oodles of room to get them down to Europe’s 0.5%. That will be achieved via the Term Funding Facility (TFF).

Consider, the TFF lends to banks at just 0.1%. At the moment it does so for only 3% of their liabilities. Yet Aussie banks have 40% of liabilities that are private-sector bonds that can be refinanced for free at the RBA. That’s plenty of falling funding costs to drive mortgage rate cuts.

For example, in Europe, the ECB now pays banks 100bps to lend money without any limits:

So long as we have a government that wants to see higher house prices then that will prevent captured regulators like APRA or reform from preventing it.

This is the absurdity of Government MPs like ‘Tiny Tim’ Wilson complaining about gutted savers. It is his own government that is doing it by running an overly tight fiscal policy that gives the RBA no choice.

Which hints at where we go next. Once the RBA uses up all of its TFF capacity, over years, and that results in even higher household debt, the banks will all along be dying of falling margins. This begins to weigh on lending and prevents any kind of economic rebound sufficient to generate inflation.

At a certain point, this absurdity then comes back to the RBA again. As governments realise they are the only borrower left with any creditworthiness, we reach the point of MMT in which it borrows and spends like mad directly from the central bank to lift economic activity. That’s when we might finally see rising interest rates rebooting conventional central bank tools.

Note that nowhere in this process does the central bank run out of ammo.

Only its role changes.

David Llewellyn-Smith


  1. Knee deep in flowers we’ll stray
    We’ll keep the showers away
    And if I kiss you in the garden, in the moonlight
    Will you pardon me?
    And tiptoe through the tulips with me

  2. “We reach the point of MMT in which it borrows and spends like mad” .
    Ah, yes. The Weimar Republic Solution. And like as not, the results will be the same. Sadly, all of them.

    • “Weimar Republic Solution” … phuleaseeeee …

      Keynes and others clearly warned that the odious War debt reparations would set off a whole chain of financial and market disasters, next the last productive capacity which Germany could use to pay back debt was appropriated by the same masters of disaster and ***induced*** a trade shock, which then started a debt cycle implosion which some refer to as currency hyper inflation. You will note that long before the currency inflation a whole clown car of actions was taken and baked in the result E.g. the currency dramas were the result of actions taken long before it imploded i.e. implying the currency was the drama and not the human agency which drove this event is woefully inaccurate at best.

      MMT just points out that money is not scarce although real resources are and where distribution and long term social outcomes are a political choice E.g. not self imposed lack of money.

      Best bit is we do know what the consequences of that historical moment were … and can decide to repeat it or not …

    • All those people sitting on the fence waiting for property prices to fall should probably consider throwing the towel in. The bubble could be quite something.

      • +1.
        Sitting on the sidelines (what I’m doing) is literally fighting the fed (RBA).

        It does not appear to be the way to get ahead.

  3. All I can see is a giant pump has been let loose to run up asset prices as main street and Jo Blow die a death of a thousand slash’s whilst the bubble merchants and rent seekers get rich beyond avarice

    • Come on Capital has been shafting labour since time immemorial, your lot was quite happy clappy about it until your lot was next in que for the treatment … own goal … own it.

        • Humans … but since you ask I find it curious that orthodox and some hetrodox economics only see reality in a binary state, how about the customer or other things not involved in the contractual setting, but still a part of it.

          You know its like some are still living or thinking in a pre-industrialization mindset …. silly me …

  4. Question.
    As banks keep using TFF from RBA but economy fails to fire up and banks bad loan continue to build higher and higher, at what point will AUD starts falling agressively as it becomes clear RBA is basically bailing out our banking system?
    My understanding is TFF will work if banks are able to pay back those loans and for that to happen banks need to get bad loans to start performing and for that to happen people need to find well paid jobs not Uber.
    On the other side we have China going full ahead with their trade war against us and we are entering second wave of covid in EU and US and possibly South America, Africa and India.

    • It’s all relative. If we were doing this in a vacuum that is exactly what would happen. But every other major economy is doing it as well and they’re going at it harder than we are. Aus looks like a pretty good investment comparatively speaking, hence our stubborn dollar in the face of the $100B QE announcement

      • I wanted to say AUD to fall against gold. Agree about what rest of the world will do/is doing.

        • Yes, what it does against gold is all that matters as all fiat currencies will fall at a roughly similar rate (as a result of competitive devaluation). When gold gets to $10k it won’t be because it’s a great investment or in some kind of Bitcoin style bubble — it’ll be because fiat will be toilet paper.

          The US dollar is key for the whole fiat money system as it is the reserve currency. Once its ‘value’ becomes truly suspect in the eyes of investors that’s when the trouble really starts.

          • Cough …. never mention those gold crashes … then some wonder about the whole boom and bust meme …

          • LOL. ‘Best bit is we do know what the consequences of that historical moment were … and can decide to repeat it or not …’!

          • Jebus, skippy, I wouldn’t worry about gold crashes in this environment, buddy. Almost impossible.

            And if they do happen — buy quickly and buy with both hands and feet.

    • Banks won’t have to recognise bad loans. I imagine they will be able to keep extending the recognition of bad loans under ‘special rules’, until ‘normal’ economic conditions return (read ability to pump immigration lever). If it never returns, then the Gov. will buy the bad loans directly.

        • AUD is relative – other countries will be facing the same issues we are facing here in AUS. It’s no accident that the RBA acts only when all other central banks implement ‘policy’. AUD will only go down if weaker relative to everywhere else (my opinion – well not really, it’s fact). I guess I’m saying, I believe the AUD will not go down because elsewhere will be weak also…

          • against gold – AUD to go agressively down against gold is what I meant to say. Right now gold price goes up in USD by a lot but as AUD also shoots up, price of gold in AUD is not moving as much as I want and/or expect.
            Otherwise yes, I agree rest of the world will be doing same so there will be race to the bottom but some currencies will fall less than others against gold.

      • If that’s the case they’ll resemble the zombie banks that proliferate in Europe right now. Balance sheets riddled with bad loans and unrecognised losses.

  5. Forget the monetary witchcraft of QE the Central Banks will soon be bypassing the constipated transmission channel operated by the debt peddlers.

    Why waste time trying to get that broken model working via ever more twisted and convoluted strategies when they can distribute money directly to economies wasting away under the weight of debt peddler mountain.

    China is already up and running.

    And not this is not UBI or “magic money” or “sit down money” blah blah blah.

    It is nothing more than a simple way of distributing new money equitably when monetary stability requires. It will be perfect for a period a debt deflation when goosed asset prices are allowed to stagnate or drift downwards.

    For the most part the new money distributions are likely to be quite modest as unlike the debt peddler channel where money is created but also destroyed when loans are repaid, this stuff once created will not just evaporate.

    • Strange EconomicsMEMBER

      You forget the problem that such a direct model, (easily done using the internet ) would result in the removal of hundreds of million dollar a year banker jobs and many other highly overpaid middle bankers.
      The impact on the 5 million dollar house market would be a catastrophic crash.
      This model cannot be used !

          • Mate, mate, told you I would snooker those MYR short sellers
            They will be speaking in a much higher pitched voice, for the forseeable future.

      • Yes and no. To the extent that investment bankers have ridden the debt-based money system to untold riches, yes. But to the extent that centrally administered ‘money’ will become worthless extremely rapidly, no. The latter will see the wealth of much more than bankers compromised.

    • I admire your tenacity but I simply don’t see how your solution will create any new money (necesarry for capitalist reproduction). Nor do I see how you can be confident that any money that is created will be allocated to more productive purposes than the current system.

      A much simpler model is to regulate the operation of the existing banking system. Simply implement a range of requirements that debt be issued only for productive purposes, restrict lending for speculative assets, incentivise lending to SMEs, couple lending policies to national industry policy. All of this has precedent in the modern era and requires no changes to any of the plumbing – and will have the desired effect of a more productive allocation of capital.

      • Yeah but …. the freedom and liberty cult will have a melt down …

        Even more so why not set the price of labour and stop with the invisible IR hand parlor tricks, not that banks and shadow sector made it moot a long time ago …

      • pfh007.comMEMBER


        “..A much simpler model is to regulate the operation of the existing banking system. ..”

        Ummmm – just ask Skippy how that worked out.

        We are living the consequences of believing that privatizing public money creation can work with just enough regulation.

        “..I admire your tenacity but I simply don’t see how your solution will create any new money (necesarry for capitalist reproduction)…”

        Which bit are you struggling with?

        Billions of dollars distributed to MyRBA accounts that pay no interest. People who wish to earn a return transfer some of their MyRBA account to those offering a return. The remainder they are free to save or consume as they see fit.

        Those offering a return are the types of folk who use funds and share capital to build companies etc.

        • Jumping jack flash

          Ah, a UBI.

          Well, for that to work they had better fix the problem of the necessity of debt first.
          Because in a debt economy, debt is as essential as breathing, and ANY spare capacity, provided by the RBA or the flooding of the workforce with 3rd world slaves, or whatever, is going to be used to obtain debt.

          Unless debt creation and issuance is regulated and rationed, AKA austerity.

        • pfh007.comMEMBER

          Not a UBI

          UBI stands for Universal Basic Income.

          That is nothing like what I have proposed. Unless of course you think you can live a on a few thousand dollars a couple of times per year.

          There is a a world of difference between money creation to avoid deflation and UBI.

      • It worked just fine till the oligarchical wealth set funded a ideological head shrinking PR marketing agenda full of screeds like the Powell memo et al. Now you have that little shadow sector [manifold the traditional] problem but post outbreak of covid it seem all eyes are on the SDR thingy.

        Always trying to have the cake and eat it too … always the same result and then stand around … after hit in the face with it … not our fault … stooopid irrational humans …

        • pfh007.comMEMBER

          “… It worked just fine till …static……crackle…….static…..pop…..”

          Perhaps ……..but it ain’t ever going to work fine again because of …….static…..crackly….zip…..wheeee….pop……

          • All the rolling back of firewalls and ideological driven perspective leads all outcomes … its sorta the same as my response to Janet about Germany post WWI. Yet some are completely driven by the after effect and not the perspectives which initiate – create the conditions which drive the result.

            Really don’t know how some arrive at the conclusion that banks or any lender created this whole mess, when historically the crumb trail of actions is a mile wide and increases over time.

            I’ll stick with more fundamental issues like I pointed out with ergodicity and mainstream economics working without a functioning model of finance or monetary systems whilst opining about legal philosophy as deduced from an imaginary perspective.

            PS who made it legal for lenders to act irresponsibly, not that is solely a social issue centered around lenders.

            Its anonymity is both a symptom and cause of its power. It has played a major role in a remarkable variety of crises: the financial meltdown of 2007‑8, the offshoring of wealth and power, of which the Panama Papers offer us merely a glimpse, the slow collapse of public health and education, resurgent child poverty, the epidemic of loneliness, the collapse of ecosystems, the rise of Donald Trump. But we respond to these crises as if they emerge in isolation, apparently unaware that they have all been either catalysed or exacerbated by the same coherent philosophy; a philosophy that has – or had – a name. What greater power can there be than to operate namelessly?

            Inequality is recast as virtuous. The market ensures that everyone gets what they deserve.

            So pervasive has neoliberalism become that we seldom even recognise it as an ideology. We appear to accept the proposition that this utopian, millenarian faith describes a neutral force; a kind of biological law, like Darwin’s theory of evolution. But the philosophy arose as a conscious attempt to reshape human life and shift the locus of power.

            Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning.

            PSS –

          • pfh007.comMEMBER

            How is your response inconsistent with exactly my point

            “…Perhaps ……..but it ain’t ever going to work fine again because of …….static…..crackly….zip…..wheeee….pop…”

            If we accept your theory there is NO HOPE.

            How could anyone possibly hope to reform anything if you believe that the “conspiracy” now controls everything the media, the banks and government.

            If your conspiracy was even half correct it still could not explain Trump.

            No one in the GOP or the DNC wanted him to be candidate in 2016..

  6. You all recall that on the 25 June, Geo.Custer asked his men how they were off for ammo
    Plenty- was the response. (they had no idea what was coming)
    But soon all 263 lay dead, overwhelmed by waves of attacks from the enemy.
    Same, same is about to occur for the RBA.

    • Yep, the RBA are done – a one trick pony. We all know what’s coming next – ever lower rates. How’s that worked out so far?

      May be next time, eh? If we just shut our eyes, cross fingers and pray, the next rate cut and dose of QE will solve al our economic problems and it’ll be boom times again. The economics establishment are truly an intellectual wasteland.

  7. “As governments realise they are the only borrower left with any creditworthiness, we reach the point of MMT in which it borrows and spends like mad directly from the central bank to lift economic activity.”

    And we’ll all be working for the government, I guess?

      • Well, actually many of them will be pretending to work by getting up in the average person’s business more and more. Think it’s bad now? Just wait until the government has armies of people working for them.

        • Not to mention all the improved IT systems to allow them to more effectively figure out what you are doing.

          • well those it systems better figure out what happened with the vote in the usa
            or the donald follows the nanny

        • Well, given Mr Putins brush off of Mr Pence
          and Mongolian coal going to China to repace our shipments
          we may have more Russian influence here than expected
          Gunna will be brushing up his Russian.

        • I reckon Gunna mulling a move to Russia is probably one of the smartest moves he could make. He may not enjoy Putin’s views on [email protected] but Putin understands economics a damn sight better than our lot do. The Head of the Russian CB (a woman – and not a ‘woke’ appointment) is one smart cookie.

      • What people don’t seem to realise is that governments could always do more. So instead of employing people in bullshit jobs in the private sector, maybe the government should be employing people to do useful things.

        • What useful things? Who gets to decide what’s ‘useful’? If you guarantee people jobs then you can guarantee that many of those jobs will be digging ditches and filling them in again (or a close approximation thereof).

          • Yes I’m sure that anything the government can get the unemployed to do will be less worth while than having them cold call people to sell them life insurance that they don’t need /sarc. There are so many BS jobs in the private sector. All they do is create churn and most of them are one step removed from the dodgy Indian in a call centre randomly calling numbers pretending to be from the tax office.
            It is a BS narrative to claim that governments only employ people to dig holes and fill them in again. As a public servant I know there are a lot of things we could be doing that would be supporting the community in useful ways, that we don’t do, because we don’t have enough people to do that work. My guess is that you’ve never been a public servant and have only worked in BS jobs like the one I described above.

        • “It is a BS narrative to claim that governments only employ people to dig holes and fill them in again. ”

          That is not what I said: I said offering a ‘job guarantee’ would lead to that outcome. In other words, if all the useful roles have been filled then, by default, ‘ditch digging’ is all that is left (ditch digging .. welfare … same thing). There are not an infinite number of useful roles.

          In addition, Govt is not part of the productive economy — it is an Admin function, which makes it a ‘cost’. If Gubmint starts to employ all unemployed people then private sector will have to wear that cost and if the Govt is growing in size relative to the private sector (the economic engine) then the private sector becomes starved of capital directed to the Admin side of the economy. The less capital available to the economy the less the economy is able to grow. Lower economic growth = less jobs. And so on. Economics 101.

  8. With an independent monetary policy and a floating exchange rate, the RBA can add foreign assets to its QE program in unlimited size. If the RBA were to exchange it’s paper asset that it can create in unlimited amounts for real assets, like precious metals, I’m sure the A$ would weaken and provide Australia all the stimulus needed…

    • It’s crazy to look at that chart and think how strong the aud has been. According to the afr the AGB’s are the Royals Royce of sovereign debt so I guess that’s part of the explanation. Great idea then that you’ve suggested. Get naive foreign money managers to fund our stimulus.
      If I’m not mistaken though, did you not suggest in a comment some months ago that Lowe wanted a strong aud? You said ‘why wouldn’t he walk on the sunny side of the street’. I didn’t fully understand why you thought that though, but I guess he’s changed tack.

      • Yes I think they’re actually opened the door (slightly) to doing this, actually mentioning it explicitly last week, which was a significant surprise. I don’t think they’ll do anything any time soon, but who knows. 10 years ago no one would have thought they’d have a zero cash rate and 100bn QE.

        My comment about Lowe was really an observation on the RBA in general. Prior to this year, I’d visit them 2-3 times a year and meet their economics people. Smart people and very nice. I always enjoyed meeting them as I’ve been a central bank economist in two banks. But I’d always be saying to them the same thing, your forecasts are too optimistic, inflation just isn’t going to rise like your models suggest – for many of the reasons MB also highlights – and they’d always have a reason for it. But at the end of the day, they’d always look on the bright side of things and that led them to make systematic errors. When I’m forecasting I’m always very conscious of whether I make systemic or random errors. The former are a big no-no as they can be corrected, the latter are likely driven by uncertainty and volatility. They just wouldn’t listen to the rationale as to why the economy wasn’t going to fire like it had in the past.

        Lowe is listening to how weak the economy is now. But for how long? The PMIs say the economy is beginning to turn up. Will they quickly backtrack as they’ve done in the past?

        • Appreciate the long response. Your comments have always been very informative and now I see why given your background.
          As far as the RBA guys go, it seems that positive thinking in what is a generally a negative world can cause very distorted results by even the smartest people. it’s maybe insensitive of me to say but Philip Lowe has always seemed like a guy hopped up on antidepressants. It is the only way I could reconcile such a stubbornly rosy outlook from such a smart guy.

    • The RBA printing AUD and buying PMs is about the smartest thing it could possibly do. If I were in charge that’s what I would do.

      And yes, it would weaken the currency (with a good delay, with any luck)

  9. adelaide_economistMEMBER

    Which is why I’m buying an expensive house, stockpiling anything ‘real’ that lasts a long time, has multiple uses and has a trade value (and in relatively small units) – alcoholic spirits I’m looking at you – and a reasonable range of tools (including hard copies of ‘how to’ books) so I can do as many things as possible myself if need be. I’ve previously held physical precious metals but I have to say trying to trade kg blocks of silver was hell. I have a feeling my ‘retirement’, if I make it that far, is not going to bear much resemblance to that of my parents.

  10. Its not the ammo we should be worried about, it the aiming thats horrible. Rates this low have the opposite effect of what they want. People with lots of cash will start hording and go to safe havens. Others will borrow way beyond thers means. All is negative cash flow in society. If it worked europe and japan would be dealing with a boom.

    • Red Head ole mate
      a large portion of the ammo has gone to those who intend to blast it into the stock market
      consequently the market is going through the roof for those shooters.
      The balance looks to have gone to those who need a bit of range practice,
      and they are just shooting it off wastefully.

    • Yeah but decades of free market dogma means no polie is going anywhere near distributional fiscal stimulus with oversight …. tantamount to commie totalitarianism … we’ll all starve … faints …..

        • I do know of the term and when it was coined and what historical context of its time, although its been noted that some ideological afflicted sorts use it out of context and have additionally a limited knowledge of the authors works E.g. cherry pick and twist the meanings of his views to advance a notion that he would have disagreed with.

    • A crash? Why, yes. But it won’t look quite how you imagine it.

      Take a recent case study: Venezuela.

      Worst in the economy in the world, best performing stock market. That should give you a hint.

      • Dont pretend to know anything about Venezuela but not sure how comparable Venezuela is to Oz when they have inflation blowing 27.9% from the previous month in September, up from August’s 24.7%, an economy that is in tatters and a share market that could be kindly described as Cyclothymic

        • The point is, if you print enough money confidence can evaporate quite quickly. It is typically non-linear in its effect.

          Bobbing along serenely one day, wake up to high inflation the next. And that’s how it will happen.