The RBA is bound by its mandate from government. This mandate needs to be re-worked by a progressive government.
Will the RBA support progressive fiscal policies? The mandate is key
Key to a progressive change is the mandate of the Reserve Bank, which is in two parts. The first is the goals set out in the Act, covering currency stability, full employment and economic prosperity. These goals appear sound and probably do not need change in the near term.
However, the devil is in the detailed interpretation of these goals, and that is where the second part, The Statement on the Conduct of Monetary Policy (The Statement), matters. This statement is mutually agreed between the treasurer and governor of the day. The format of the statement is not prescribed. It can be brief or detailed, as long as both parties agree.
In a neoliberal climate, the Statement has reflected neoliberal priorities. The latest statement, from 2016, sounds truly medieval in today’s world, calling for a focus on inflation and an inflation target of 2-3 per cent. Nothing about social considerations.
Governor Lowe’s words from the past year pave the way for new thinking. He said inflation was no longer the great menace it once was. He invited new ideas, perhaps even a new Statement, with words like “welfare maximisation” being the main objective, and “enhancing the economic welfare of the people we serve”. Could such terms be woven into a new Statement to drive central bank monetary policy in future?
He also said there was a need to re-think the conventional wisdom that just achieving low inflation is enough to maximise economic welfare; that “we are seeking to achieve the maximum sustainable rate of employment.” Another term for inclusion in the Statement?
His words are refreshingly progressive; some on the neoliberal right might even suspect a streak of socialism in the governor. But his apparent invitation to re-negotiate the Statement is an opportunity not to be missed.
Much will also depend on the definition of a number of other words like “crisis” and “full employment”. If the RBA can be persuaded that Australia’s crisis is more than the virus, that there is also a social crisis, then it might be persuaded to take an extended view of the use of QE. Similarly, full employment should be interpreted as “minimum unemployment and underemployment” to be meaningful.
How will QE end?
While the RBA holds large quantities of government debt instruments, it is earning interest from government. The general understanding in central banking is that government has final say about what to do with central bank earnings.
The BOE routinely returns interest earned from the government to the treasury, meaning that government is borrowing from the BOE interest-free. In the same way, the ECB returns its earnings via its member central banks to their respective treasuries. And the Fed does the same, to the US Treasury.
And what happens when the bonds mature? An intriguing question. Michael Ashton (“What’s wrong with money?: The biggest bubble of all”; John Wiley) suggests this tantalising possibility – monetising the debt:
“When a government is in real trouble, it sometimes resorts to printing money—in the old days, it would print actual money; today, of course, we don’t need the printing press to accomplish the same thing electronically. But this almost always leads to a collapse of the currency, since ever-larger quantities of money are set against the same amount of societal resources. But there is a sneakier way to accomplish the same thing, and that is for the government to borrow money, issuing bonds to represent the debt, and then to have the central bank exchange the debt for money, and thereafter retire the debt. In that case, the government need never pay back the debt, and the money remains in circulation. It is the same as printing money, in the end.
“Of course, the sneaky bit is that we don’t know whether the debt has been monetized until after the debt matures. If the debt matures while the central bank is holding the bonds, then monetization has been accomplished. If the debt is sold back into the market prior to maturity, then the transaction has been reversed and no monetization has occurred.”
The ideas of QE and, even worse, debt monetisation have always invoked horror among neo-classical economists. Confidence would collapse, capital would flee, the exchange rate would collapse, followed by runaway inflation. We have seen widespread QE among major economies. No runaway inflation; in fact, no inflation. Perhaps this is because when everyone does it and the interest rate is near zero, there is nowhere for capital to flee.
What might happen then if all major economies agreed to monetise their debt? Who can say for sure. But clearly, all those trillions of dollars of mobile money floating around the world looking for a profitable home will be worth a lot less.
So far (at 22 May), the government has sold about $65 billion of bonds under the crisis package, about half maturing in four years or less, and most of the rest in 10 years or later. The RBA has bought about $50 billion, suggesting that the market wanted only about $15 billion. This round of RBA bond-buying is unlikely to be unwound soon.
How will this ideological drama play out?
Quite obviously, the old model of neoliberalism has proven to be a dismal failure. Paul Kellogg (“Gods outside the market: Central banks, China and the emergence of neoliberal state capitalism”; World Review of Political Economy; 2017) believes that neoliberalism is saving itself post-GFC by transforming itself through QE.
After years of denigrating the China model and predicting its collapse, neoliberalism is embracing aspects of that model. He calls the new model “neoliberal state capitalism” – state capitalism run on neoliberal priorities.
But Kellogg also muses: “If the state can ‘push’ trillions of dollars into the economy through an intimate relationship with financial institutions, what is to stop it from developing an intimate relationship with other kinds of institutions (hospitals, schools, public housing authorities, green job collectives to name just four), and push those trillions into the economy directly – into health care, education, social services, sustainable economic development, etc.?” Would it then be fair to call such a model “progressive state capitalism”?
A new Australia is unfolding. Whether progressives will have their way will depend on their representatives in Parliament.
(John Tan was a deputy editor in the Straits Times newspaper in Singapore. He has been foreign editor and business editor.)