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Is the Reserve Bank in Denial?

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During the recent Senate Estimates, I questioned the Reserve Bank about the effect of the ascendant BRICS alliance on the Reserve bank’s holdings of US Dollars (USD) and US Treasuries (UST). I also asked Mr Lowe about his expectations of the US Economy’s movement in the next few years and how this may affect Australia. Mr Lowe avoided any pessimistic projections regarding the US economy.

I then asked if the Reserve Bank was increasing its gold reserves as a precaution against the BRICS group releasing a gold-backed currency. The RBA has actually reduced our gold reserves from a peak of $5.2 billion to $3.9 billion now. The answer I received was also negative.

I think this is a mistake. Australia should be increasing our gold reserves as a hedge against international currency fluctuations in the uncertain times ahead.

Transcript

Chair: Senator Roberts?

Senator Roberts: I have a question about the Reserve Bank’s reserves. Let me get to it by giving some background. At the BRICS meeting in Cape Town on 2 and 3 June, 13 nations will formally apply to join BRICS, which is currently Brazil, Russia, India, China, South Africa—and Saudi Arabia, with an each-way bet. Candidate nations include Mexico, Argentina, the United Arab Emirates, Egypt, Indonesia and Iran. BRICS is now the world’s largest trading bloc, accounting for 25 per cent of world trade which is expected to grow to 50 per cent by 2030. And it’s big in oil. BRICS member states are abandoning the US dollar in favour of using their own currency or the Chinese renminbi in an environment where other countries, including Australia, are doing the same thing. Pakistan is now buying Russian oil and renminbi. The US dollar is now denominating just 58 per cent of all world trade. The United States has printed $10 trillion over the last seven years, doubling their M2 money supply. That increase has been absorbed in part by an increase in international trade. As the world moves away from the US dollar the value of the US dollar may fall. The Reserve Bank holds United States treasuries and dollars. Have you modelled the effect on your balance sheet from that probable fall in  the value of US holdings.

Mr Lowe: Not as a result of these other global changes you’ve talked about. We spend a lot of time and part of our risk management processes looking at volatility in currencies, because currencies move around all the time, don’t they? That affects the value of those assets on our balance sheet, so we model that from a risk-management perspective. Despite the developments you’re talking about, most countries still hold the bulk of their foreign reserves in US dollars. There’s diversification going on, which is good, but the US dollar is going to remain the dominant currency for some time.

Senator Roberts: What is the value of Reserve Bank holdings of US dollar and US treasuries in Australian dollars?

Mr Lowe: Our total foreign reserves at the moment I think are the equivalent of U$35 billion. What’s the share, Brad?

Dr Jones: I think it’s 55 per cent.

Mr Lowe: Roughly half of that $35 billion is allocated to US dollars, and then we have holdings of yen, Korean won, euros and rmb.

Senator Roberts:  What about treasuries?

Mr Lowe: When we hold US dollars we invest it in US Treasury securities. We don’t invest in bank deposits or any other securities. We invest in US government securities.

Senator Roberts:  What’s the reverse holding of Australian government currency and bonds held by the US government or their agencies?

Mr Lowe: We don’t have data on that.

Senator Roberts:  Could you get that on notice?

Mr Lowe: No.

Senator Roberts:  You don’t have it?

Mr Lowe: We don’t have data on specific holdings of other countries.

Dr Jones: If I understood your question correctly, Senator, the US holds euros and yen, from recollection, but not in large quantities.

Senator Roberts:  While that arrangement helps with international stability across holdings, it is a method for backdoor quantitative easing. Does the Reserve Bank expect to increase your holding of US treasuries in the next 12 months?

Mr Lowe: We’ve just done an exercise where we were looking at how much of our balance sheet should be held in foreign assets. We said we’ve got $35 billion at the moment. As the size of the economy grows you would expect that to gradually increase. But, no, nothing dramatic. As the economy grows and the nominal value of the Australian economy gets bigger, then you would expect a bigger portfolio in US dollars and foreign currency.

Senator Roberts:  The Reserve Bank has a mission to anticipate movements in major trading partners and in world markets. As it affects your provisioning and portfolio, does the Reserve Bank anticipate being affected by any out of the ordinary moves in financial markets in connection with the US economy or the US dollar over forward estimates?

Mr Lowe: We’ve recently been focused on the US debt limit issues in the US. If an agreement had not been reached there, that would have had implications for currency markets and economies around the world. So that’s one thing that we’ve looked at carefully. It looks like that has been resolved, thankfully. And, just as part of our general risk management exercise, we’re looking at developments in other economies and their implications for currency markets in own economy.

Dr Jones: As a general rule though, the way the bank has operated its reserves has changed quite a bit over the last, say, 25 years, and now the bank effectively sets key benchmarks and sticks to them. There are not big discretionary decisions going on every day. There’s wild speculation going on at the Reserve Bank, I can assure you, about the future value of exchange rates.

Senator Roberts:  I wasn’t implying that. Worldwide purchases of US treasuries by central banks has fallen $600 billion in 2022 as compared to a baseline year of 2013. That’s just arbitrary—2013. Purchases of gold have increased $300 billion. So something is going on that Australia would be prudent to hedge against. Is the Reserve Bank increasing its gold reserves as an each way bet against BRICS introducing a gold brick currency of some form?

Mr Lowe: No, we’re not. We’ve got our gold reserves. We haven’t bought and sold for a long time and we have no intention of changing that at the moment.

Senator Roberts:  Thank you, Governor.

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The RBA is trying to send everyone broke to fix the inflation they caused by printing too much money

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RBA creates inflation by printing money out of thin air

Since 2019 the RBA created $508 billion out of thin air through electric journal entries. I have been warning the RBA directly that this money printing will contribute to the inflation we are experiencing.

What did Governor Phillip Lowe say? He acknowledged I warned about creating money, he acknowledged it was a mistake and he also said nation building projects like Iron Boomerang would help fix inflation.

Transcript

Senator ROBERTS : Thank you both for being here. Dr Lowe, in 2016, I had my first Senate estimates session. I asked the Treasury secretary, who at the time was John Fraser, a question about the huge increase in money supply. He pretty much dismissed me and said, ‘No, don’t worry about it.’ At the next Senate estimates session, he said yes; he acknowledged it. In the third one, he said, ‘Yes. The theory is that it will lead to inflation, you’re correct, but we haven’t seen it yet and we don’t know why.’ So I understand that it’s a vexing problem. You said that one of the solutions is to make the pie bigger. You are saying that the answer to the government’s funding dilemma is to grow the economy and, as a result, the tax base. Have you heard of the project Iron Boomerang? We’ve got the world’s best metallurgical coal for making steel in the east coast and the best iron ore in the west coast. It would build a railway line fully funded. The investors are ready to go. There is a Senate inquiry taking off on it pretty soon. It would take coal to the west and iron ore to the east. There would be massive steelmaking complexes both in the east coast and the west coast. It would remove shipping and road transport. It would be a huge investment. It would add $100 billion to our GDP, which is five per cent. It would open up the north and all of central Australia for the Indigenous living there and rural communities and agriculture. Is that something that we should be thinking about?

Mr Lowe : If the rate of return on that investment is as you describe it and both the financial and social returns are as you describe them, it is something to think about. There may be other projects that have better returns. I don’t want to endorse it, because I don’t know anything about it. But, in principle, we should be looking at the financial and social returns we get from these projects. If they are greater than the cost of funding and the economy has enough resources to do it, then certainly we should be thinking about it.

Senator ROBERTS: We’ve got investors, we’re told, from overseas lining up and also from within. I will come back to the formal questions I had. The Reserve Bank spent the COVID years increasing the money supply, as Deputy Governor Debelle said at the time, by electronic journal entry; they are his words. It is commonly called printing money. At an earlier estimates, I was given a figure of $508 billion as the total for electronic journal entries since 2019. Can you update that figure, please?

Mr Lowe : That’s still roughly the same. I think our balance sheet is a bit over $600 billion at the moment.

Ms Bullock: It is about $600 billion. Exchange settlement account balances are probably around $450 billion or something like that.

Mr Lowe : Our balance sheet has roughly $100 billion of banknotes on it. That is still $100 billion of banknotes. That is $4,000 for every person in the country, which I find extraordinary. That is one of the elements on our balance sheet. We have these exchange settlement balances, which is the electronic money that you talked about.

Senator ROBERTS: Thank you. So inflation has gone from not a problem to a 30-year high, 7.8 per cent in the December quarter. On 2 February 2022, Dr Lowe, you said that inflation had surprised on the upside. In March 2022, you predicted inflation would peak at 4.2 per cent. That was at the ABA, Australian Banking Association, conference that we both attended. Why were you surprised, Dr Lowe, when many, including myself, had spent 2020 and 2021 warning the Reserve Bank and the government, including at Senate estimates, that the sheer volume of this money expansion would inevitably cause significant inflation?

Mr Lowe : You were one of these people who were making the argument that the money supply expansion was ultimately going to be inflationary. That has played a role. As we were talking about before, at least half, maybe three-quarters, of the increase in inflation is due to what went on in Europe and the supply-side disruptions. The expansion of money supply, the low interest rates and, I would say, the government support during the pandemic have driven inflation. But it’s not the full story.

Senator ROBERTS: Is 7.8 per cent inflation the price the public is paying for the Reserve Bank supporting the government’s wasteful mismanagement of COVID using lockdowns and other restrictions, leading to JobSeeker, JobKeeper and mismanagement that the government caused, which is what necessitated the money creation? Did you even consider saying to the government, ‘No, I’m not going to print the massive amount of money, so perhaps reconsider your COVID strategy’?

Mr Lowe : No. We did not do—I want to be very clear about this—the money creation at the request of the government. The nine people who sit on the board of the Reserve Bank decided to do this. We had meetings with the government and we understood—

Senator ROBERTS: Was it because the government had put in place so many onerous restrictions?

Mr Lowe : No. It is easy to forget this now. In early 2020, we were being told by the health people that tens of thousands of Australians would be dead within months. Remember that there were preparations for, including in the Reserve Bank, temporary morgues in our cities. Our borders were closed. We were told the vaccine was maybe three years or longer away. This was going to be something that would take the society a long time to get over. That is what we were being told. That was the information—

Ms Bullock: And we were observing what was happening overseas.

Mr Lowe : And we were seeing what was going on in New York and Italy. It was really terrible and scary. People were locked in their homes. That was the base upon which we made the decision to go on this route. It turns out that the scientists developed a vaccine much more quickly and the economy was more resilient and we did too much. But we didn’t do too much because the government told us to or we wanted to; we thought it was the right thing to do given the information we had at the time.

CHAIR: We’re out of time for this line; sorry, Senator Roberts.

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RBA rate rise pain caused by Government incompetence

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$969 represents the total rise in repayments on a $500,000 mortgage since Treasurer Jim Chalmers has been in office.

While rate rises may have been foreseeable, they are only happening because of the Government’s incompetence causing inflation in the first place.

The government printed hundreds of billions of dollars out of thin air, leading to massive inflation which the RBA is trying to bring under control with a sledgehammer.

Australians who bought a house under the RBAs promise that rates wouldn’t rise until 2024 are struggling with more pain to come.

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RBA props up banks with $100 Billion

The Reserve Bank of Australia has just given $100 billion to prop up the banks but why is the government ignoring spending that would increase our productive capacity like road, coal power stations and dams?

Transcript

[Marcus Paul] All right, the RBA this week cut the interest rate down to you know, virtually nothing. 0.1% interest rates. So I mean, it’ll help people buy or stay in their homes, but there is a cost of course, self-funded retirees as we’ve talked about on the programme, who rely on investment income, and seeing their returns fall to basically nothing.

[Malcolm Roberts] That’s right. And then so, these people providing for their so-called own retirement is just hot air, because the legs had been cut out from under them now. We’re now at the point where retirees are having to spend their capital, because the return on their nest egg is almost non-existent and heading negative. And what’s disturbing is that, you know, this is going to create a lot of pressure for people at a time when people don’t need it. And by printing another a hundred billion, and giving it to the banks, they’re going to prop up the banks to do more mortgage lending. This government, the state and federal are completely ignoring the need to invest in productive capacity. We need to invest in power stations, dams, roads, ports bridges. The Iron Boomerang Scheme, the Bradfield Scheme. These and many other prime investments, opportunities in our country

[Marcus Paul] Yeah.

[Malcolm Roberts] Are being neglected. And we need to get into building the productive capacity of our country.

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